===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005
Commission file number 1-9178
KOOR INDUSTRIES LTD.
------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
-------------------------------------------------------------------------------
Israel
------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
14 Hamelacha Street, Rosh Ha'ayin 48091, Israel
------------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant
to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------------------- -------------------------------
New York Stock Exchange
American Depositary Shares, Each
Representing 0.20 Ordinary
Shares, Par Value NIS 0.001 Per Share
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
None
-----------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
------------------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 16,162,467 Ordinary Shares, Par Value NIS 0.001 Per Share
---------------------------------------------------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes X No
------- --------
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes No X
--------- -------
Note--checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
------- --------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer X Accelerated Filer Non-accelerated filer
----- ----- -----
Indicate by check mark which financial statements the registrant has elected to
follow:
Item 17 X Item 18
------- --------
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- -------
===============================================================================
PRELIMINARY NOTE
This annual report contains historical information and forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995 with respect to Koor's business, financial condition and results of
operations. The words "anticipate," "believe," "estimate," "expect," "intend,"
"may," "plan," "project" and "should" and similar expressions, as they relate to
Koor or its management, are intended to identify forward-looking statements.
Such statements reflect the current views and assumptions of Koor with respect
to future events and are subject to risks and uncertainties. Many factors could
cause the actual results, performance or achievements of Koor to be materially
different from any future results, performance or achievements that may be
expressed or implied by such forward-looking statements, including, among
others, changes in general economic and business conditions, changes in currency
exchange rates and interest rates, inability to meet efficiency and cost
reduction objectives, changes in business strategy and various other factors,
both referenced and not referenced in this annual report. These risks are more
fully described under Item 3, "Key Information - Risk Factors" of this annual
report. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected, intended, planned or projected. Koor does not intend or assume any
obligation to update these forward-looking statements.
In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "Koor," "we," "us," or "our" are to Koor
Industries Ltd., a company organized under the laws of the State of Israel, and
its consolidated subsidiaries.
In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "$" or "dollars" are to U.S. dollars and
all references to "NIS" are to New Israeli Shekels. Unless otherwise stated,
certain amounts reported in adjusted NIS on Koor's consolidated financial
statements for the year ended December 31, 2005 have been translated into U.S.
dollars for the convenience of the reader at the exchange rate of the dollar on
December 31, 2005 (NIS 4.603 = $1.00), as published by the Bank of Israel (see
Note 1C to our consolidated financial statements included elsewhere in this
annual report). Therefore, it is possible to compute the dollar equivalent of
any of the figures in adjusted NIS by dividing such NIS by the rate of exchange
at December 31, 2005.
In this document, all references to Koor's percentage of equity
ownership in its subsidiaries are prior to having taken into account the
possible dilution that may be caused by the exercise of options granted to
executive officers of certain subsidiaries or of other convertible securities.
During 2005, Koor sold part of its investments in Makhteshim-Agan
Industries Ltd. and Telrad Networks Ltd. As a result, Koor ceased to control
these companies, which resulted in their deconsolidation during 2005. These
companies are now included in Koor's consolidated financial statements according
to the equity method. As a result of the deconsolidation of these companies and
to reflect the nature of the Koor's activities as a holding company, we have
classified our statement of operations in a single-stage format. Total revenues
and earnings, including Koor's equity in the results of affiliates, are
presented within revenues. The
i
comparative figures have been reclassified on a consistent basis. As a result,
Koor's results of operations for the year ended December 31, 2005 are not
comparable, on a line by line basis, to previous years; however, net earnings
is comparable to the prior periods.
TABLE OF CONTENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisers..............1
Item 2. Offer Statistics and Expected Timetable............................1
Item 3. Key Information....................................................1
Item 4. Information on the Company........................................13
Item 4A. Unresolved Staff Comments.........................................40
Item 5. Operating and Financial Review and Prospects......................41
Item 6. Directors, Senior Management and Employees........................65
Item 7. Major Shareholders and Related Party Transactions.................77
Item 8. Financial Information.............................................80
Item 9. The Offer and Listing.............................................84
Item 10. Additional Information............................................86
Item 11. Quantitative and Qualitative Disclosures About Market Risk.......103
Item 12. Description of Securities Other than Equity Securities...........106
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies..................107
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds..............................................107
Item 15. Controls and Procedures..........................................107
Item 16A. Audit Committee Financial Expert.................................107
Item 16B. Code of Ethics...................................................107
Item 16C. Principal Accountant Fees and Services...........................108
Item 16D. Exemptions from the Listing Standards for Audit Committees.......109
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.......................................................109
PART III
Item 17. Financial Statements.............................................110
Item 18. Financial Statements.............................................110
Item 19. Exhibits.........................................................110
Index to Consolidated Financial Statements...................................F-1
Index to Consolidated Financial Statements of Makhteshim-Agan
Industries Ltd.............................................................F-147
Index to Consolidated Financial Statements of ECI Telecom Ltd..............F-238
ii
PART I
Item 1. Identity of Directors, Senior Management and Advisers.
-----------------------------------------------------
Not Applicable.
Item 2. Offer Statistics and Expected Timetable.
---------------------------------------
Not Applicable.
Item 3. Key Information.
---------------
Selected Financial Data
The following selected consolidated financial data as of December 31,
2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 have been
derived from our audited consolidated financial statements included in this
annual report. These financial statements have been prepared in accordance with
generally accepted accounting principles in Israel, or Israeli GAAP, which
differ in certain significant respects from U.S. GAAP (see Note 29 to our
consolidated financial statements included elsewhere in this annual report), and
audited by KPMG Somekh Chaikin, independent registered public accountants. The
consolidated selected financial data as of December 31, 2001, 2002 and 2003 and
for the years ended December 31, 2001 and 2002 have been derived from other
audited consolidated financial statements not included in this annual report.
The selected consolidated financial data set forth below should be read in
conjunction with and are qualified by reference to "Item 5, Operating and
Financial Review and Prospects" and the consolidated financial statements and
notes thereto and other financial information included elsewhere in this annual
report.
The financial data amounts are expressed in NIS or in dollars. For the
convenience of the reader, the 2005 data contain translations of NIS into
dollars. No representation is made that NIS amounts have been, could have been
or can be converted into dollars at the prevailing rate on December 31, 2005, or
at any other rate. In accordance with amendments to Israeli GAAP published in
October 2001 and December 2002, our financial statements for the years ended
December 31, 2004 and 2005 are no longer adjusted to reflect the effects of
inflation. For all financial reporting periods until December 31, 2003, Israeli
GAAP required that our consolidated financial statements recognize the effects
of inflation. Consequently, all figures for prior periods have been adjusted to
reflect the increase in the Israeli Consumer Price Index, or CPI, and are
accordingly all expressed in terms of the purchasing power as of December 31,
2003, and not in the figures as originally reported.
1
Year Ended December, 31
----------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except share and per share data)
Adjusted NIS as of December 31, 2003 NIS US Dollars
------------------------------------------- --------------------------- -----------
Operating Data:
Israeli GAAP:
Revenue and earnings
Revenue from sales and services... 5,913,651 5,752,475 6,338,626 8,007,613 988,382 214,726
Group's equity in the operating
results of investee companies,
net (1)(2)....................... (1,894,525) (251,961) (116,729) (35,060) 363,535 78,978
Other income, net................. - - - - 223,205 48,491
----------- ----------- ----------- ----------- ----------- -----------
4,019,126 5,500,514 6,221,897 7,972,553 1,575,122 342,195
6,602,236 6,096,321
Costs and losses(3)................. (2,583,110) (595,806) 5,879,485 7,148,500 1,237,724 268,895
Earnings before income tax.......... 342,412 824,053 337,398 73,300
Minority interest in consolidated
companies' results, net........... 5,991 (65,014) (207,006) (430,921) 9,135 1,985
Net earnings (loss) from continuing
operations........................ (2,604,997) (800,452) 41,553 120,802 265,832 57,752
Net earnings from discontinued
operations(4)..................... (47,083) 33,483 4,809 24,188 50,381 10,945
Cumulative effect as of the
beginning of the year of change in
accounting method(5).............. - - - - (3,054) (663)
Net earnings (loss) for the year.... (2,650,927) (766,969) 46,362 144,990 313,159 68,034
Basic earnings (loss) per share..... (174.54) (50.55) 2.95 8.85 18.92 4.11
Weighted average number of shares
used in computing basic earnings
(loss) per share.................. 15,188,463 15,173,291 15,716,725 16,381,279 16,555,143
Diluted earnings (loss) per share... (174.54) (50.55) 2.95 8.85 18.92 4.11
Weighted average number of shares
used in computing diluted earnings
(loss) per share.................. 15,188,463 15,173,291 15,716,725 16,381,279 16,555,143
U.S. GAAP:
Net earnings (loss)................. (2,599,987) (762,511) (108,924) 111,572 351,459 76,354
Basic earnings (loss) per ordinary
share............................. (171.17) (50.25) (7.04) 7.05 21.85 4.75
Basic earnings (loss) per ADS....... (34.23) (10.05) (1.41) 1.41 4.37 0.95
Diluted earnings (loss) per ordinary
share............................. (171.17) (50.65) (7.82) 4.89 19.77 4.30
Diluted earnings (loss) per ADS..... (34.23) (11.75) (1.56) 0.98 3.95 0.86
Balance Sheet Data:
Israeli GAAP:
Working capital..................... 1,644,637 710,281 790,086 765,493 543,383 118,050
Total assets (1)(2)................. 13,514,082 13,432,798 11,869,757 13,129,354 5,292,436 1,149,780
Short-term debt..................... 1,741,014 2,224,771 1,527,942 1,657,200 272,127 59,119
Long-term debt...................... 4,625,272 3,941,847 3,119,606 2,259,211 1,609,296 349,619
Shareholder's equity................ 2,195,834 1,727,169 1,740,393 1,876,467 2,482,607 539,346
U.S. GAAP:
Total assets (1)(2)................. 13,818,527 13,788,604 12,012,241 6,342,023 5,346,120 1,161,443
Shareholder's equity................ 2,065,672 1,626,469 1,582,122 1,767,850 2,483,112 539,455
Number of shares outstanding........ 15,168,884 15,173,377 15,741,160 15,824,185 16,146,668
2
(1) As a result of the sale of a portion of our interest in MA Industries in
February 2005, as described elsewhere in this annual report, we discontinued the
consolidation of MA Industries' results effective as of January 1, 2005.
Accordingly, MA Industries' financial statements are not consolidated in our
consolidated financial statements as of and for the year ended December 31,
2005, but rather are recognized according to the equity method. See Note 3B(2)
to our consolidated financial statements included elsewhere in this annual
report.
(2) As a result of the sale of a portion of our interest in Telrad Networks to
Fortissimo in two stages, one in November 2004 and the other in June 2005, as
described elsewhere in this annual report, we proportionally consolidated Telrad
Networks' results from October 1, 2004 through June 30, 2005 and we discontinued
the consolidation of Telrad Networks' results effective as of July 1, 2005.
Accordingly, Telrad Networks' financial statements are not consolidated in our
consolidated financial statements as of and for the six month period ended
December 31, 2005, but rather are recognized according to the equity method. See
Note 3C(1) to our consolidated financial statements included elsewhere in this
annual report.
(3) Costs and losses includes cost of sales and services, selling and marketing
expenses, general and administrative expenses, other expenses, net and financing
expenses, net.
(4) The financial statements have been reclassified in respect of Elisra
Electronic Industries Ltd. and Koor Trade Ltd. that have been presented as
discontinued operations. See also Note 24 to our consolidated financial
statements included elsewhere in this annual report.
(5) Israel Accounting Standards Board (IASB) Accounting Standard No. 19 on
"Taxes on Income" (published July 2004) became effective for periods beginning
on January 1, 2005. We adopted this standard as a cumulative effect of a change
in accounting method. The transition to this standard resulted in a one-time
effect of a net decrease in net earnings of NIS 3 million derived mainly from an
increase in liabilities for deferred taxes relating to property. See Note 2(S)
to our consolidated financial statements included elsewhere in this annual
report.
3
Exchange Rate Information
The following table shows, for each of the months indicated the high
and low exchange rates between New Israeli Shekels and U.S. dollars, expressed
as shekels per U.S. dollar and based upon the daily representative rate of
exchange as reported by the Bank of Israel:
Month High (NIS) Low (NIS)
------------------ --------------- ---------------
January 2006............................... 4.658 4.577
February 2006.............................. 4.664 4.725
March 2006................................. 4.658 4.717
April 2006................................. 4.503 4.671
May 2006................................... 4.522 4.428
June 2006.................................. 4.524 4.436
The following table shows, for periods indicated, the average exchange
rate between New Israeli Shekels and U.S. dollars, expressed as shekels per U.S.
dollar, calculated based on the average of the exchange rates on the last day of
each month during the relevant period as reported by the Bank of Israel:
Year Average (NIS)
-------------- -------------------
2001....................................................... 4.203
2002....................................................... 4.738
2003....................................................... 4.530
2004....................................................... 4.482
2005....................................................... 4.488
On June 30, 2006, the exchange rate between New Israeli Shekels and
U.S. dollars, as reported by the Bank of Israel, was NIS 4.440 to U.S.$1.00.
The effect of exchange rate fluctuations on our business and operations
is discussed in "Item 5. Operating and Financial Review and Prospects."
Dividends
In determining whether to declare a dividend, our Board of Directors
may take into consideration, among other things, our profits, business and
financial condition, economic circumstances and other conditions, as deemed
appropriate by our Board of Directors.
We did not pay or declare any dividend for 2005, 2004, 2003, 2002 or
2001.
4
Risk Factors
Risks Related to Koor
We depend on our subsidiaries and affiliates for distributions and management
fees.
We conduct our business primarily through our wholly and partially
owned subsidiaries and affiliates, and are partially dependent upon management
fees and cash distributions from our subsidiaries and affiliates as a source of
cash flow for funding our corporate level activities. We received management
fees in the amount of NIS 20 million and NIS 22 million in 2005 and 2004,
respectively, pursuant to management agreements between us and several of our
subsidiaries and affiliates. In addition, in 2004 we received NIS 135 million in
distributions from subsidiaries and affiliates, of which NIS 68 million was
received from Makhteshim-Agan Industries Ltd., or MA Industries and NIS 67
million was received as an initial liquidating distribution in respect of our
wholly owned subsidiary, Tadiran Ltd., or Tadiran. In 2005, we received NIS 114
million in distributions from subsidiaries and affiliates, of which NIS 82
million was received from MA Industries and NIS 14 million was received as a
final liquidating distribution in respect of Tadiran.
In recommending dividends and approving management fees, the directors
and applicable committees of each of our subsidiaries must take into
consideration the legal, tax, and financial effects of such dividends and
management fees, as well as the best interests of each such subsidiary. In
addition, several of our subsidiaries and affiliates are subject to dividend
payment restrictions derived from their organizational documents, credit
agreements and tax considerations. If we were to experience a substantial
reduction in the level of payments of dividends and management fees, there can
be no assurance that alternative sources of cash flow, including bank loans and
asset sales, would be available for us to carry out our investment plans, pay
dividends on our capital stock and service our debt.
In addition, all of our unsecured indebtedness is effectively
subordinated to all liabilities, including trade payables of our subsidiaries
and affiliates. Any right we have to receive assets of our subsidiaries and
affiliates upon their liquidation or reorganization (and the consequent right of
the holders of our indebtedness to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's or affiliate's
creditors (including trade creditors), except to the extent that we are
recognized as a creditor of such subsidiary or affiliate, in which case our
claims would still be subordinate to any security interests in the assets of
such subsidiary or affiliate and any indebtedness of such subsidiary or
affiliate senior to that held by us. Under Israeli law, certain indebtedness of
a company under liquidation, including certain indebtedness resulting from an
employment relationship or tenancy, and certain indebtedness resulting from
governmental and municipal tax liabilities, may rank senior to other unsecured
indebtedness.
If the sectors of the telecommunication equipment market targeted by our
affiliated company do not continue to grow, that affiliated company's results of
operations, and consequently, our net earnings, may be materially adversely
affected.
For the years ended December 31, 2005 and 2004, our equity in the
results of our affiliated company ECI Telecom Ltd. or ECI, accounted for
approximately 18% and -10%,
5
respectively, of our consolidated net earnings. As of December 31, 2005 and
2004 our investment in ECI accounted for 32% and 36%, respectively, of our
total shareholders' equity.
ECI has targeted the optical networks and broadband sectors of the
telecommunication equipment market, which have expanded in recent years. The
optical networks market is being driven by the significant increase in cellular
subscription in emerging markets and the building of "third generation" networks
in more developed countries. The broadband market has benefited from a
substantial expansion in broadband subscription, particularly in Europe and the
range of services being offered, including the recent introduction of "triple
play" applications (voice, data and video - in particular IP television - has
increased. Furthermore, in June 2005, ECI purchased Laurel Networks Inc. for $88
million, and Laurel became ECI's data networking division, one of ECI's core
businesses.
If either the optical networks market or the broadband market fail to
continue to grow, or if ECI is unable to respond adequately and take full
advantage of the growth, or if ECI is unable to increase sales of data
networking products sufficiently, ECI's business and results of operations may
be materially adversely affected and consequently, our net earnings may be
materially adversely affected.
Our affiliated companies need to develop and introduce new products and
penetrate new markets in the telecommunication equipment and agrochemical
businesses in order to remain competitive in those industries. These affiliated
companies are also partially dependent on licensed technology.
For the years ended December 31, 2005 and 2004, our affiliated
companies, ECI and Telrad Networks Ltd., or Telrad, which operate in the
telecommunication equipment business, and MA Industries Ltd., or MA Industries,
which operates in the agrochemical business, together accounted for
approximately 103% and 81%, respectively, of our consolidated net earnings. In
addition, as of December 31, 2005 and 2004, our investments in ECI, Telrad and
MA Industries together accounted for approximately 102% and 122%, respectively,
of our total shareholders' equity. The business and market in these segments are
characterized by rapid technological and product development. Consequently, the
ability to anticipate changes in technology and to develop and introduce new and
enhanced products on a timely basis will be significant factors in the ability
of these businesses to grow and remain competitive. We cannot assure you that
our affiliated companies will be able to develop new products and technologies
on a timely basis in order to remain competitive in the telecommunication
equipment and agrochemical industries.
The telecommunications equipment market is very competitive and our affiliated
companies that are active in this market face intense price pressure,
particularly from Chinese competitors. Such competition and price pressure could
materially adversely affect these affiliated companies' results of operations,
and consequently, our net earnings.
ECI and Telrad, two of our affiliated companies, operate in the
telecommunications equipment market. As of December 31, 2005 and 2004 our
investments in ECI and Telrad accounted for approximately 34% and 44%,
respectively, of our total shareholders' equity.
6
The telecommunications market is very competitive and competition may
increase in the future. Current competitors in this market include Alcatel,
Huawei, Lucent, Marconi (recently acquired by Ericsson), Nortel, Siemens and
others. All of these are larger than our affiliates and may have greater name
recognition, broader product lines, larger customer bases, and more extensive
relationships with customers. They may also have greater resources than those
currently available to our affiliates. In addition, our affiliates may face
particularly intensive price pressure as a result of competition from Chinese
vendors.
Increased competition and pricing pressure could have a material
adverse effect on our business, financial condition and operating results and
may result in lower margins, loss of market share and other adverse factors.
Telrad, one of our significant affiliates, depends on one key customer.
Telrad, one of our significant affiliates, is substantially dependent
upon its relationship with Nortel as a key supplier of technology and as a key
customer of Telrad's products. For the years ended December 31, 2005 and 2004,
approximately 34% and 62%, respectively, of Telrad's sales were derived from
sales to Nortel. Accordingly, Telrad's sales volume is directly influenced by
Nortel's sales forecasts and actual purchases. Although we and Telrad believe
that the relationship with Nortel is generally good, if such relationship was to
be terminated or diminished for any reason, it could have a material adverse
affect on Telrad's business, financial condition or results of operation, which
may have an adverse effect on our net earnings.
Economic instability in the emerging markets of South America and Central and
Eastern Europe poses a risk to the agrochemicals business of MA Industries, one
of our significant affiliates.
The activity of MA Industries in South America (mainly Brazil) and in
countries in Central and Eastern Europe, is exposed to risk resulting from the
possibility of economic instability in these countries such as exchange rate
fluctuations (customer accounts receivable are in local currency), high
inflation and interest rates, and changes in economic legislation. A portion of
the above mentioned risks are hedged by means of various instruments. The
relative share of our agrochemicals activities in these markets is decreasing
over the years due to MA Industries' strategy to expand its activities in
economically-stable markets.
7
Disruption in the supply of raw materials and/or disruption in transportation
services could have a negative impact on MA Industries' agrochemicals business.
MA Industries imports raw materials to its manufacturing facilities in
Israel, and exports products to its non-Israeli subsidiaries for manufacturing,
formulation and distribution through three Israeli ports. In the event that one
of these ports will be disrupted for an extended period of time, such as during
an employee strike, MA Industries may have significant difficulty obtaining raw
materials required for manufacture of its products, or obtaining them at
economically viable prices. Similarly, MA Industries may be unable to transport
its products to its non-Israeli subsidiaries for manufacturing, formulation and
distribution, or to transport them at reasonable costs. Therefore, extensive
disruptions at one of these ports could have a negative effect on MA Industries'
agrochemicals business.
Concentration of manufacturing in a limited number of manufacturing facilities
could pose a risk for MA Industries' agrochemicals business.
A significant part of the manufacturing activities of MA Industries
takes place in a limited number of facilities. Significant damage to any of
these facilities due to natural disaster or other causes could have a
significant negative impact on MA Industries' agrochemicals business.
MA Industries' operations are exposed to stricter environmental, health and
safety regulations and standards
Companies in the plant protection products industry, such as several of
MA Industries' subsidiaries, purchase, manufacture, sell and distribute
materials that can be hazardous to the environment. Consequently, their
activities are subject to comprehensive regulation concerning the storage,
handling, manufacture, conveying, use and disposal of those products, their
components and their byproducts. Specifically, MA Industries' subsidiaries'
manufacturing and formulation facilities in Israel, Brazil, Colombia, Greece and
Spain operate, in each of those countries, in accordance with environmental
standards for air pollution, removal of effluents, the use and handling of
hazardous materials, methods for the removal of waste and the cleaning up of
existing environmental pollution. Over the years, these standards have become
steadily stricter in their environmental requirements and their enforcement in
each of these countries, and the cost of compliance has risen in parallel.
In addition to the current costs of compliance, MA Industries'
subsidiaries are required to bear a one-time expense for compliance. Since the
subsidiaries are unable to assess environmental issues with any certainty, the
funds they allocate or will allocate for projects for environmental improvement
can turn out to be insufficient. Both ongoing costs deriving from compliance
with these requirements and the one-time expenses can have an adverse effect on
their business, on their financial situation and on the results of their
operations. The subsidiaries are working to a master plan (for implementation in
2005-2008) for investments in improving the handling of effluents and
purification of the air, which is expected to require about $60 million.
MA Industries' subsidiaries hold various permits on environment-related
issues, which define the conditions for operating its various manufacturing
facilities. Expansion of production
8
in its plants requires new or additional permits. The terms of the permits can
change or can be disqualified by the relevant regulator. Stricter terms,
disqualification or changes in permits or their terms could have an adverse
effect on the financial condition of MA Industries and the results of its
operations. For details about legal proceedings see Item 8 included elsewhere
in this annual report.
MA Industries' agrochemicals business may be negatively impacted in the event of
significant product liability claims that exceed our insurance coverage.
The activities of MA Industries are exposed to risk relating to product
liability claims. MA Industries has insurance coverage for third party liability
and defective products of up to $300 million per annum. In the event that MA
Industries would be found liable in a lawsuit concerning product liability, its
insurance coverage may not be sufficient to cover the damages, and this may have
a significant negative impact on our agrochemicals business. Furthermore,
publication of the existence of such a claim could have a negative impact on the
reputation of MA Industries, and this could have a negative impact on its
business.
Our investments in hi-tech companies involve a high degree of risk.
Our investment in hi-tech companies is conducted through Koor Corporate
Venture Capital, or Koor CVC. As at December 31, 2005 our Koor CVC hi-tech
portfolio comprised of 6 active companies, a limited partnership in Pitango
venture capital fund and a 23% interest in Scopus Network Technologies Ltd.
(18.2% on a fully diluted basis), with a total book value of NIS 166 million
(approximately $36 million).
Our investment in hi-tech and venture capital companies carries with it
a high level of risk. The main risk factors are:
o The uncertainty involved in advanced technological developments
in the fields of internet and telecommunications, and the lack of
certainty that a product will actually be developed or, if and
when it is developed, that a market will be found for it, as well
as the high marketing costs and intense competition in these
fields;
o The uncertainty existing on the date of commencement of projects
as to the total investment required for developing a product and
the lack of certainty that funding will be found for the
continued development and marketing of products, if developed;
o The rapid technological changes that characterize the industries
of the companies in which we have invested could reduce or cancel
demand for products developed by such companies;
o The dependence of start-up companies, including those in which we
have invested, on their founders or on key personnel, especially
in the areas of management and development;
o The lack of certainty regarding the ability of the companies in
which we have invested to recruit appropriate personnel, in
particular when faced with increasing competition for quality
personnel;
9
o The lack of intellectual property protection for internet
products and increased competition in this area; and
o The lack of ability to control and manage a company in which we
hold a minority stake.
Several of our affiliates are exposed to fluctuations in prices of raw
materials and commodities.
Several of our affiliates, primarily those in the agrochemical
industry, have exposure to risks stemming from fluctuations in prices of raw
materials and agricultural commodities. An increase in raw material prices or a
decrease in commodity prices (which could lower the selling prices of our
products) could lower the profitability of our business.
Risks Related to Israel
Exchange rate fluctuations and inflation in Israel impact our business.
A significant portion of the sales of our major subsidiaries and
affiliates are made outside Israel in dollars or other non-Israeli currencies
while these companies incur significant portions of their expenses in NIS.
Alternatively, some subsidiaries and affiliates whose sales are principally in
NIS incur expenses in dollars or in other non-Israeli currencies. For example, a
significant portion of the sales of our telecommunication equipment, defense
electronics and the agrochemicals businesses are in dollars, whereas a
significant portion of these businesses expenses are incurred in NIS and are
partially linked to the Israeli CPI. In addition, certain borrowings are linked
to the dollar or other non-Israeli currencies or to the CPI. During the calendar
years 2003, 2004 and 2005, the annual rate of inflation was approximately -1.9%,
1.2% and 2.4%, respectively, while the NIS appreciated against the dollar by
approximately 7.6% and 1.6% in 2003 and 2004, respectively, and depreciated
against the dollar by approximately 6.8% in 2005. Consequently, during the
calendar years 2003, 2004 and 2005, the annual rate of inflation as adjusted for
devaluation was approximately 6.2%, 2.8% and -4.1%, respectively. Continued
delay in or lack of any devaluation of the NIS in relation to the dollar or
other currencies may have a material adverse effect on our results of operations
and financial condition.
To compensate for inflation in Israel and changes in the relative value
of Israeli currency compared to the dollar and other currencies, we have adopted
financial strategies, including entering into foreign currency transactions with
respect to certain specific commitments and general hedging transactions with
respect to monetary assets and liabilities denominated in non-Israeli currencies
(including Brazilian currency). There can be no assurance, however, that such
activities, or others that we may undertake from time to time, will eliminate
the negative financial impact of such fluctuations.
Conditions in Israel may affect our operations.
We and our principal subsidiaries and affiliates are incorporated under
the laws of the State of Israel, where our principal offices and a substantial
portion of our operations are located. We are directly influenced by the
political, economic and military conditions affecting Israel.
10
Accordingly, any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its present trading partners, a
significant increase in inflation or a significant downturn in the economic or
financial condition of Israel could have a material adverse effect on our
business, our results of operations and our financial condition. In addition,
there are a number of countries, particularly in the Middle East, which
restrict business with Israel or Israeli companies. There can be no assurance
that restrictive laws or policies directed toward Israel or Israeli businesses
will not have an adverse impact on the expansion of our business.
Hostilities in the West Bank and Gaza Strip may affect tourism and other
businesses.
In September 2000, there was an escalation of violence in the West Bank
and Gaza Strip and increased terrorist activities within Israel, causing a sharp
decrease in tourism to Israel in the years 2000-2003 and a further deceleration
in all aspects of the Israeli economy. The areas of tourism and aviation were
most affected by the increased hostilities, and the recession in the Israeli
real estate market has become more entrenched.
Since the second half of 2003, there has been a gradual improvement in
inbound and domestic tourism. In addition, there are initial indications of a
positive improvement in the real estate market as seen through increased project
initiations and real estate prices.
However, we are unable to predict the duration of this trend or the
extent of any impact that it may have on our revenues or results of operations.
Any return to a prolonged and substantial political turmoil will likely have an
adverse impact, which may be material, on our business, financial condition and
results of operations. In addition, market perception that these conditions
could have an impact upon us may harm the trading price of our ordinary shares,
whether or not our business or results of operations are actually affected.
Many of our directors, officers and employees are obligated to perform military
reserve duty in Israel.
Most able-bodied male adult citizens and permanent residents of Israel,
including some of our directors, officers and employees, are obligated to
perform annual military reserve duty, which could accumulate annually from
several days to up to two months in special cases and circumstances. The length
of this reserve duty depends, among other factors, on an individual's age and
position in the military. Additionally, these residents may be called to active
duty at any time under emergency circumstances. Reserve duty may be increased as
a result of an increased level of violence with the Palestinians or military
conflict in the region. We have operated effectively under these requirements
since we began operations. No assessment can be made, however, as to the full
impact of these requirements on our workforce or business if conditions should
change and we cannot predict the effect on us of any expansion or reduction of
these obligations.
Israel's economy may be destabilized.
Israel's economy has been subject to a number of destabilizing factors.
These include a period of severe inflation in the early to mid-1980s, low
foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. For these and other reasons, the Government of
Israel has intervened in different sectors of the economy. Such intervention has
11
included employing fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates.
The Israeli government has periodically changed its policies in all of these
areas. Changes in these policies may make it more difficult for us to operate
our business as we have in the past.
Service and enforcement of legal process on us and our directors and officers
may be difficult to obtain.
Service of process upon our directors and officers and the Israeli
experts named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since substantially
all of our assets, all of our directors and officers and the Israeli experts
named in this prospectus, are located outside the United States, any judgment
obtained in the United States against us or these individuals or entities may
not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, or Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, in original actions
instituted in Israel. However, subject to certain time limitations and other
conditions, Israeli courts may enforce final judgments of United States courts
for liquidated amounts in civil matters, including judgments based upon the
civil liability provisions of the Securities Act and the Exchange Act.
Risks Related to Our Ordinary Shares
Our share price may be volatile and may decline.
Numerous factors, some of which are beyond our control, may cause the
market price of our ADSs or ordinary shares to fluctuate significantly. These
factors include, among other things, announcements of technological innovations,
earnings releases by us or our competitors, market conditions in the industry
and the general state of the securities markets (in particular the technology
and Israeli sectors of the securities markets).
Our operating results in one or more future periods may fluctuate significantly
and may cause our share price to be volatile.
Our quarterly operating results may be subject to significant
fluctuations due to various factors, including divestitures of companies,
competitive pressures and general economic conditions. Because a significant
portion of our overhead consists of fixed costs, our quarterly results may be
adversely impacted if sales fall below management's expectations. As a result,
our results of operations for any quarter may not be indicative of results for
any future period. Due to all of the foregoing factors, in some future quarters
our sales or operating results may not meet the expectations of public market
analysis or investors. In such event, the market price of our ADSs and ordinary
shares would likely be materially adversely affected.
12
Item 4. Information on the Company.
--------------------------
We are a company limited by shares organized and existing under the
laws of the State of Israel. We were initially incorporated in 1944 and our full
legal and commercial name is Koor Industries Ltd.
The address of our registered office is 14 Hamelacha Street, Rosh
Ha'ayin 48091, Israel, and our telephone number is +972-3-900-8333. The address
of our Internet website is: www.koor.com. Our ADSs are listed on the New York
Stock Exchange and our ordinary shares are listed on the Tel-Aviv Stock
Exchange, both under the ticker symbol KOR.
General
We are a diversified investment holding company. We are engaged,
through our direct and indirect, wholly and partially owned subsidiaries and
affiliates, in the following core businesses: telecommunication equipment,
defense electronics, agrochemicals, tourism and aviation, technology as well as
in other businesses.
Following the sale in 2005 of part of our investments in MA Industries,
an agrochemical producer, and in Telrad, a telecommunication solutions provider,
we ceased to control these companies and deconsolidated them during 2005. The
companies are now included in our consolidated financial statements according to
the equity method. As a result, our results of operations for the year ended
December 31, 2005 are not comparable, on a line by line basis, to previous
years; however, net earnings is comparable to the prior periods.
For the year ended December 31, 2005, we reported consolidated earnings
before income tax of approximately NIS 337 million ($73 million) and
consolidated net earnings of approximately NIS 313 million ($68 million).
Business Overview
Major Shareholders
In October 1997, as a result of several transactions, the Claridge
Group (comprised of Claridge Israel Ltd. and affiliated entities) became our
largest shareholder. During January 1999, Claridge Israel Ltd. transferred its
holdings to Claridge Israel L.L.C. which, during December 2003, transferred half
of its holdings to Esarbee Investments Limited. As of June 30, 2006, Claridge
Israel L.L.C., Esarbee Investments Limited and affiliated entities (which now
comprise the Claridge Group) together held approximately 30.3% of our
outstanding ordinary shares.
On May 1, 2006, Discount Investments Corp. Ltd., a subsidiary of IDB
Development Corporation Ltd., signed an agreement to acquire from the Claridge
Group, as well as from Anfield Ltd. (a company registered in Israel and owned by
Jonathan B. Kolber, our Chief Executive Officer) and another company related to
the family of Jonathan B. Kolber, all of our shares held by those entities
totaling 5,753,207 shares, or approximately 34.9% of our outstanding shares, for
$445.8 million. All approvals, to which the transaction was subject, including
Israel's anti-trust commissioner, have been granted. On July 3, 2006, this
transaction closed and 5,081,033 of our shares, or approximately 30.9% of our
outstanding shares, were
13
transferred to Discount Investments Corp. for approximately $394 million, and a
put option, exercisable during December 2006, was granted to Anfield Ltd. in
respect of the remaining 672,174 shares. Subsequent to the transfer of shares,
seven of our current directors resigned from our Board of Directors, namely Mr.
Charles R. Bronfman, Mr. Andrew Hauptman, Adv. Roni Feinstein, Mr. Chemi Peres,
Mr. Dan Propper, Mr. David Rubner and Prof. Gabriela Shalev. The following five
new directors were nominated - Mr. Nochi Dankner, Mr. Avi Fischer, Mr. Zvi
Livnat, Mr. Yitzhak Manor and Mr. Ami Erel. The final composition of the Board
of Directors will be determined within the next few weeks. Furthermore, we
expect that changes in the composition of our management will occur. Discount
Investments is held 74.2% by IDB Development, which also directly holds 10% of
our outstanding ordinary shares.
Strategy
Beginning in July 1998, we initiated an extensive corporate
restructuring program, designed to transform Koor into a diversified investment
holding company with controlling stakes in leading high-growth, export-oriented
Israeli companies. Based on these criteria, we have made the strategic decision
to focus on three businesses: telecommunication equipment, defense electronics
and agrochemicals.
We have implemented key elements of our strategy to date, including a
substantial capital reallocation process, in which proceeds from the sale of low
growth domestic businesses have been re-invested to increase our stakes in our
core businesses. In this regard during the years 1999 through 2001 we divested
ourselves of our non-core holdings, including our interests in Koor Insurance
Agency, Koor Finance, Contahal, Merhav, the Switching Division of Tadiran
Telecommunications, Tekem, Tadiran Information Systems, Koor Metals, Phoenicia,
Yonah, Tadiran Com, Tadiran Telematics, Mashav, Merkavim Metal Works Ltd.,
Middle East Tube Co. Ltd. and the Q Group PLC. We also sold real estate assets
of Koor Properties for approximately NIS 47 million in 2001 and real estate
assets of Tadiran for approximately NIS 273 million in March 2002.
During 2005, we continued to work closely with our portfolio companies
to take active measures to create value. These measures include identifying new
market opportunities; focusing on core competencies, while divesting non-core
assets; bringing in new strategic partners; and streamlining group operations.
In 2005 we completed Israel's largest private sector defense transaction. The
transaction, initiated in the second part of 2004 included the sale of our
entire 70% shareholding in the Elisra Defense group, an electronic warfare
manufacturer, and our entire 32% shareholding in Tadiran Communications, a
communications solutions provider, to Elbit Systems, a defense solutions
provider.
During 2005 we acquired, from the Federmann Group, 7.7% of the
outstanding ordinary shares of Elbit Systems.
In July 2005, we received, as a dividend in kind, 70% of Dekolink
Wireless Ltd., from the Elisra Defense group. Dekolink Wireless offers solutions
for expanded cellular coverage outdoors and in buildings.
14
During 2005, we took advantage of our increased financial strength,
positive trend in the capital markets and the low interest rates in Israel and
sought to refinance our bank debt. On April 10, 2005, as part of a private
placement to Israeli institutional investors, we issued NIS 400 million par
value in debentures, as well as 800,000 options for NIS 400 million in cash. The
debentures bear annual interest of 3.75%, linked to the CPI, which is paid on
April 30 and October 31 of each year. The debentures are linked to the CPI and
will be repaid in a balloon payment on April 30, 2010. The issue proceeds were
allocated to the components of the package according to the fair value of the
securities issued. Accordingly, the discount in respect of the debentures
amounted to approximately NIS 22 million which will be amortized as finance
expenses over the life of the debentures. During 2005, we also refinanced an
additional NIS 944 million of our bank debt for an additional 5 years, through
to 2010, at lower interest rates than the previous debt. In 2006, we continued
with the refinancing measures and refinanced an additional NIS 343 million of
bank debt for repayment in 3 years.
On April 15, 2005, we sold all the ordinary shares we held in treasury
(193,229 shares) to an overseas institutional investor for approximately NIS 50
million.
On January 29, 2006, we signed an agreement to acquire 50% of Epsilon
Investment House, or Epsilon, for NIS 106 million. Epsilon is one of Israel's
fastest growing boutique money management firms. Through the acquisition we
sought to take advantage of the evolving local capital market following the
Bachar committee reforms. On April 11, 2006 we completed the transaction after
all the necessary approvals were received including that of Israel's Capital
Markets commissioner.
On April 25, 2006, we signed an agreement for the sale of our entire
holding in Koor Trade to a group of managers, including one of our senior
executives, for $8.3 million. The transaction was completed on May 28, 2006, and
the entire cash proceeds of $8.3 million were received.
Our Telecommunication Equipment Business
Our affiliated companies, ECI and Telrad, operate in the
telecommunication equipment business and ECtel Ltd., in which we owned 14.8%
interest as of December 31, 2005, also operates in the telecommunication
equipment business.
As of December 31, 2005, our principal affiliated and other companies
in the telecommunication equipment business were:
Percentage
Of Equity
Ownership Principal Products and Services
------------- -------------------------------------------------
ECI Telecom Ltd. 29.7% Telecommunication equipment and systems
ECtel Ltd. (1) 14.8% Fraud management and revenue protection software
Telrad Networks Ltd. 61.0% Telecommunication equipment and systems
(1) As a result of the distribution of ECtel shares by ECI to its shareholders
on June 29, 2006, as described below, our interest in ECtel Ltd. increased
to 19.2%.
15
ECI Telecom Ltd. (ECI)
ECI is a provider of network, routing and access solutions for optical
and digital communications networks. ECI designs, develops, manufactures,
markets and supports telecommunications solutions for evolving services,
including voice, data video and multimedia, and building next generation
converged networks. ECI's products and platforms are designed to create and
manage bandwidth, maximize revenues for network operators, reduce its customers'
operating expenses, expand network capacity, improve network performance and
enable new revenue-producing services. ECI markets its products globally to over
300 wireline and wireless service providers.
ECI operates primarily through the following three divisions, although
it has certain other operations and interests:
o The Broadband Access Division which develops, manufactures,
markets and sells innovative access products that enable
telecommunications service providers to mass deploy broadband
networks and offer a variety of new advanced services. The
division's solutions enable telecommunications service providers
to enhance their existing local loop usage performance and
efficiency, increase line capacity and facilitate advanced
services on existing infrastructure. These solutions also enable
providers to introduce fiber to the curb, node and premises
(FTTx) as well as similar solutions, such as addressing the use
of copper telephone wire and fiber to provide voice, data, and
video services at multi-megabits and gigabits per-second speeds,
with even higher capacity and support the entire range of
broadband technologies, including various types of DSL. The
division's primary product is the Hi-FOCuS(R) 5, a multi-service
access gateway, or MSAG, Which offers high functionality and
feature-rich broadband access including video and interactive
television. The full service access gateway also fits seamlessly
into any network topology with a wide choice of network interface
types. The division's customers are principally incumbent local
exchange carriers and large operators and include Deutsche
Telekom AG and France Telecom.
o The Optical Networks Division which provides telecommunications
service providers with intelligent and flexible high-density,
data-aware optical solutions for the metro access, metro-core and
regional networks. The division's product line enables end-to-end
transport of voice and data circuits from the user's premises to
high-capacity optical backbones, supports the process of
streamlining the use of optical networks and allows
telecommunications service providers to offer additional services
with greater efficiency. These optical network systems are used
by wireline operators, cellular operators and carriers of
carriers. Its primary product is the XDM(R), a multi-service
provisioning platform, or MSPP. The XDM integrates, within a
single shelf, the functions of dense wavelength division
multiplexing, or DWDM, a method of multiplexing signals by
transmitting them at different wavelengths through the same optic
fiber, intelligent optical networking multiplexer, broadband,
narrowband, wideband and digital cross connects, IP, L2 switching
and
16
asynchronous transport mode, or ATM, switching as well as
streaming support and synchronous digital hierarchy, or SDH,
add-drop multiplexers. This all-in-one optical platform provides
operators with a flexible, cost-effective implementation that
scales economically.
o The Data Networking Division which was established following
ECI's acquisition of Laurel Networks, Inc. in June 2005 (see
below), develops, manufactures, markets and sells
high-performance broadband routers that enable telecommunications
carriers and service providers to deliver IP-based data, voice,
and video services. The division's technology allows carriers to
transition from Internet-only service delivery models to advanced
"triple-play" networks. Designed to meet carriers' scalability
needs, the division's broadband edge routers allow new services
and capabilities to be added to carrier networks - without
incremental cost - as the subscriber base grows.
In addition, ECI operates in the areas of next generation telephony
solutions via its minority interests in Veraz Networks Inc., or Veraz, a private
company in which ECI holds a 41.5% interest. Veraz is a global provider of voice
over IP, or VoIP, softswitches, media gateways and digital compression products
to wireline, broadband and wireless service providers. Its holding in Veraz
enables ECI to maintain a foothold in an important strategic market, while at
the same time focusing internal resources on ECI's core businesses. In addition
to its packet telephony products, Veraz also operates in the DCME market of
bandwidth optimization solutions. DCME systems simultaneously compress toll
quality voice, fax, voice band data, native data, and signaling. The system
improves transmission media efficiency and helps achieve maximum bandwidth
utilization and guaranteed QoS provision of traffic payloads. Veraz was formed
in December 2002, by the combination of the principal activities of ECI's NGTS
operations with those of NexVerse Networks, Inc.
ECI's other operations include the remaining activities of its NGTS
unit, following the transfer of the principal NGTS operations to Veraz, which
primarily focuses on the supply of DCME systems to Veraz, which has exclusive,
world-wide distribution rights for these systems.
In April 2005, ECI acquired the optical activities and technology of
Eastern Communications Co. Inc. of China, for approximately $8.5 million, which
broadened its multi-service provisional platform product line. The acquired unit
was merged with the operations of ECI's partly-owned Chinese subsidiary,
Hangzhou ECI Telecommunications Co., or HETC, which is part of the Optical
Networks Division. As a result of the transaction, ECI's interest in HETC
increased to approximately 72.4%.
In April 2005, ECI completed the sale to ABN Amro Bank N.V of Notes and
convertible warrants that had been issued to us in connection with debt owed to
ECI by Global Village Telecom Ltda., a Brazilian company. The consideration for
the transaction was the sum of $96.2 million paid to ECI in cash, plus a further
potential amount of approximately $3.3 million, based upon the occurrence of
certain contingencies. The transaction resulted in the recognition by ECI of a
net gain from recovery of doubtful debt of approximately $10.4 million,
excluding the contingent amount.
17
In June 2005, ECI completed its purchase of 100% of the outstanding
common shares of Laurel Networks, Inc., for the sum of $88 million, paid in
cash. Following the transaction, Laurel Networks became the Data Networking
Division (see above).
Under U.S. GAAP, for the year ended December 31, 2005, ECI reported
revenues of $630 million, gross profit of $262 million, income from continuing
operations of $40.6 million and net income of $39.9 million. Under Israeli GAAP,
ECI's net income for the year ended December 31, 2005 was $56.2 million. ECI is
included in our financial statements on an equity basis only. As of December 31,
2005, our equity interest in ECI was approximately 29.7%.
For a discussion of material legal proceedings relating to ECI, please
see "Item 8, Financial Information - Legal Proceedings."
ECtel Ltd.
ECtel Ltd., or ECtel, is a leading global provider of Integrated
Revenue Management (IRM) solutions for wireline, wireless, converged and
next-generation operators. ECtel offers carrier-grade products that address
rapidly evolving telecom business and technological needs. ECtel leverages its
dedicated IRM focus, financial stability, and blue-chip customer base to provide
a comprehensive array of flexible, proven solutions with rapid return on
investment.
ECtel offers telecom operators the very best in Integrated Revenue
Management. As the world-leading provider of real-time fraud prevention
solutions, ECtel is an expert in proactively monitoring networks and operations
support systems (OSSs) to minimize revenue leakage and maximize visibility of
all revenue streams.
Through ECtel's integrated modular offerings, operators enjoy the
benefits of lower hardware, integration and operating costs.
Founded in 1990, ECtel is a premier developer of real-time detection
and prevention technologies for triple-play applications. Underscored by its
deployment of the world's first 3G and VoIP fraud prevention systems, ECtel
delivers solutions that support state-of-the-art networks for both prepaid and
postpaid services. A flexible architecture for all of the Company's products
assures operators a safe investment and smooth migration into the next
generation.
Our investment in ECtel is presented in our consolidated financial
statements by the cost method for Israeli GAAP purposes, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore ECtel's
results are not included in our results of operations.
On June 29, 2006, ECI distributed all of its remaining shares in ECtel
(approximately 15.9%) to ECI's shareholders of record. The distribution ratio
was approximately 0.025 ECtel shares for each share of ECI. Koor received
815,660 ECtel shares in this distribution, as a result of which Koor now holds a
19.2% interest in ECtel.
Telrad Networks Ltd.
On June 22, 2005, we completed the second stage of the sale of shares
of Telrad, thereby completing the sale of 39% of Telrad's shares. Under the
original agreement, mutual agreement of the Koor group and another shareholder,
Fortissimo GP Capital Fund L.P., or Fortissimo, is
18
required on significant matters relating to Telrad's ordinary course of
business. However, two additional shareholders joined Fortissimo and together
purchased 19.5% of Telrad shares for $6.25 million to complete stage two of the
sale. These additional shareholders are not party to the rights that require
mutual agreement and therefore, the proportionate consolidation of Telrad was
discontinued as of June 30, 2005, and as of that date our investment in Telrad
is presented according to the equity method.
Telrad is an innovative developer and marketer of telecom products and
end-to-end solutions. Telrad has over 50 years of experience in both legacy
switching and next generation networking, and has a long-standing partnership
with Nortel Networks. Telrad provides reliable networking solutions to many
countries in Latin America, Africa, Eastern Europe and Asia Pacific and is
selling its products in West Europe and North America through channels like
Alcatel and Alvarion.
Telrad's operations are divided into the following four divisions:
Optical Solutions Division
Telrad's Optical Solutions Division provides solutions for Next
Generation metro optical networks via Direct, OEM and ODM channels. This
division was created in 2005 from the former ODM division (original development
manufacturer).
System Integration Division
Telrad's System Integration Division, formerly PNI, provides end-to-end
solutions for telecom and service providers. The System Integration Division
specializes in integrating cutting-edge, best of breed components including
Telrad's' own innovative IP/NGN products. The System Integration Division
delivers full and efficient transition into profitable triple play and IPTV
networks. The solutions consider the operator's needs, technology,
infrastructure and financial model, fitting an end to end best of breed solution
to client needs.
IP/NGN Division
Telrad's IP/NGN Division designs and develops key innovative IP/NGN
solutions portfolio, positioning Telrad as a leading power in the global
telecommunications market. The products enable Cable TV Operators, wireless and
wireline telecom carriers and ISPs to easily and cost effectively offer
feature-rich telephony services over Wireline, Wireless, Cable and other
broadband IP infrastructures.
As the pioneer and leading provider of Last Mile Voice and Media over
IP solutions, the IP/NGN Division is committed to apply Telrad vast market
experience and development expertise to continue to meet operators' evolving
needs.
Global Operations Division
Telrad's Global Operations Division provides advanced operations
solutions and services, including new product introduction management, system
house services and complete supply chain management for Telrad's own
manufacturing needs and for other companies.
19
New Products Development Division
In May 2006, Telrad's management announced an organizational change
whereby it established one New Products Development Division that combines the
Optical Products and the IP/NGN divisions. All sustained work was transitioned
to the Global Operations Division to enable the new division to focus on
developing new products for the company.
Telrad Reorganization Plan
In 2004, Telrad's board of directors approved a reorganization plan
that included employee layoffs. For the years ended December 31, 2004 and 2005,
we recorded expenses in the amount of NIS 38 million and NIS 29 million,
respectively, under the item "other expenses" in our statement of operations.
Telrad Subsidiaries
comMATCH Ltd., a wholly-owned subsidiary of Telrad, is a leading
provider of Last-Mile over IP solutions for telecommunications operators,
creator of DUET Carrier Grade VoIP (Voice over Internet Protocol, Gateways
portfolio. comMATCH is a spin-off of Telrad Networks. The company's mission is
to deliver carrier class VoIP and Media over IP solutions enabling Multi-Service
Operators and alternative carriers to deliver reliable, high-quality and
feature-rich telephony services over IP and TDM networks. The DUET family of
products enables customers to seamlessly bridge Legacy Public Switched Telephone
Network, or PSTN, and IP networks via various alternative infrastructures, like
Cable TV, xDSL, fixed broadband wireless, Gigabit Passive Optical Networks
(GPON) and more. The company's technology provides connectivity and
interoperability for Next Generation Access and Public Networks. comMATCH's
sales in 2004 and 2003 totaled $3.9 million and $1.8 million, respectively.
At the beginning of 2006 all the activities of comMATCH were merged
into Telrad's IP/NGN division.
Telrad Connegy Communications Inc. (Connegy)
Telrad held 52% of its U.S. based subsidiary, Connegy, whose main
products consist of the UNITe Family of Business Systems and IP and LAN
telephony solutions, including the advanced i.Picasso 6000 IP telephone and the
CNS 3200 Enhanced Hosted Communications Platform. Connegy provides enterprise
customers, carriers and others with a comprehensive family of digital and VoIP
telecommunication solutions and applications
In November 2005 the Board of Directors of Telrad decided to sell
Connegy. In February 2006 Telrad sold Connegy to a third party.
Telrad Ukraine limited
During 2005 Telrad established a fully owned subsidiary in Ukraine. The
subsidiary is serving as a low cost development center serving Telrad's
development needs across all Telrad's divisions, Optical Solutions, IP/NGN and
Global Operations.
20
Telrad's Relationship with Nortel
On April 23, 2002, Nortel and Telrad signed license and distribution
agreements, allowing Telrad to sell products based on Nortel know-how and
technology to a defined list of carriers in countries in which Nortel does not
intend to conduct business and/or in which its activities are limited. During
2003, a number of distribution and license agreements were signed by the parties
covering three of the major areas of operation of Nortel. In February 2005,
Telrad and Nortel entered into a master reseller agreement, which unified the
parties' obligations under their previous distribution and license agreements.
Other Telecommunication Equipment Business
In addition to ECI and Telrad, a small portion of our telecommunication
equipment business is conducted by Microwave Networks Inc., or MNI, in the
United States and Dekolink Wireless Ltd., or Dekolink, in Israel. Dekolink
Wireless offers solutions for expanded cellular coverage outdoors and in
buildings. For the years ended December 31, 2005 and 2004, MNI and Dekolink had
sales of approximately NIS 275 million ($60 million) and NIS 176 million ($38
million), respectively.
As described above, we also have direct ownership of approximately
14.8% in ECtel, following the distribution by ECI, on May 10, 2004, of 7.6
million of its shares in ECtel to its shareholders, including us, and additional
360 thousand shares purchased from Telrad on December 10, 2005. As a result of
the distribution of ECtel shares by ECI on June 29, 2006, as described above,
our shareholding in ECtel increased to 19.2%.
Our Defense Electronics Business
Elbit Systems Ltd, in which we owned a 7.7% interest as of December 31,
2005, operates in the defense electronics business and is the controlling
shareholder of Elisra Defense Group (70%) and Tadiran Communications (43%),
which also operate in the defense electronics business.
As of December 31, 2005, our principal investment in the defense
electronics business was:
Percentage
Of Equity
Ownership Principal Products and Services
----------------- ---------------------------------
Elbit Systems 7.7% Holding Company; Command, control,
communications and intelligence
systems for defense applications
and Electronic warfare, equipment
and systems
On December 27, 2004, we entered into a series of agreements with Elbit
Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or Federmann. Under
the terms of the agreements, we would sell our entire holdings in Tadiran
Communications to Elbit for $146
21
million. Concurrently, we would acquire 9.8% of Elbit's share capital from
Federmann for $99 million. According to the shareholders' agreement, Federmann
has undertaken to support the appointment and vote for the election of
directors to Elbit's Board who are nominated by us, in a number equal to the
greater of (a) two directors or (b) 20% of the number of Elbit's directors, and
we have undertaken to vote for the election of all the candidates nominated by
Federmann for the offices of the other directors of Elbit. Furthermore, we have
undertaken to vote, in every matter and proposed resolution submitted for
approval to a general shareholders' meeting of Elbit's shareholders, in
accordance with instructions given to us by Federmann, subject to certain
exceptions.
The sale of the shares of Tadiran Communications and the purchase of
the Elbit shares would be executed in two stages, as follows:
In the first stage, which was completed on April 18, 2005, we sold to
Elbit 13.8% of the shares of Tadiran Communications to Elbit for $63 million and
concurrently we acquired 5.3% of the shares of Elbit from Federmann for $53
million. After the closing of the first stage, we were entitled to appoint one
director of Elbit's board, and Elbit was entitled to appoint three of the
members of Tadiran Communications' board of directors.
Pursuant to the original series of agreements, in the second stage, we
were, inter alia, to have realized the balance of our holdings in Tadiran
Communications and in Elisra Electronic Systems Ltd., or Elisra, in which we had
a holding of 70%.
On July 6, 2005, the original agreements between us and Federmann and
between us and Elbit were amended, whereby Amended Stage 2 and Amended Stage 3
were stipulated. According to Amended Stage 2, we acquired 2.45% of the shares
of Elbit from Federmann for $24.7 million. We announced that as long as we hold
Elbit shares we will not invoke our right to appoint 20% of the Elbit directors
and therefore our investment in Elbit is stated by the cost method.
Additionally, we sold to Elbit 5% of the shares of Tadiran
Communications for $23 million and recognized a gain in the amount of NIS 11
million. After execution of this transaction, we and Elbit acted by virtue of
the joint holdings, so that half of the directors in Tadiran Communications
(other than the external directors) were appointed by us and half by Elbit.
According to Amended Stage 3 between us and Elbit, it was stipulated
that we would sell to Elbit 13.2% of the shares in Tadiran Communications for
$60 million, as well as all of its holdings in Elisra (70%) for $70 million and
for additional consideration contingent on future insurance receipts in respect
of a fire that occurred in the plants of Elisra's subsidiaries in 2001.
On November 30, 2005, after all the requisite approvals for closing the
sale were received, Stage 3 was closed. The said sale generated a capital gain
to us of NIS 148 million in respect of the sale of Elisra, which was recorded in
the statement of operations in the fourth quarter of 2005. Moreover, as a result
of the sale, the financial statements were reclassified, such that the operating
results of Elisra and the capital gains generated from its sale were reported as
discontinued operations.
22
Following the sale, we hold approximately 7.7% of Elbit Systems, which
in turn holds 70% of the Elisra Defense Group and 43% of Tadiran Communications.
Elbit Systems
Elbit Systems Ltd., or Elbit, develops, manufactures and integrates
advanced, high-performance defense electronic and electro-optic systems for
customers throughout the world. Its major activities include command, control,
communication, computer and intelligence (C(4)I) systems and intelligence
surveillance and reconnaissance (ISR) systems for defense and homeland security
applications. Elbit also performs upgrade programs for airborne, ground and
naval defense platforms, often as a prime contractor, and supply advanced
turnkey Unmanned Airborne Vehicle (UAV) systems.
Elbit is one of the few companies upgrading both Western and former
Eastern bloc defense platforms. In addition, Elbit is one of only a few upgrade
contractors in the world who also integrate, develop and manufacture electronic
and electro-optic systems and products.
In 2000, Elbit Systems merged with Elop Electro-Optics Industries Ltd.
(El-Op). Following the merger, El-Op became a wholly-owned subsidiary of Elbit.
The merger enhanced Elbit's position as the largest non-government owned defense
company in Israel.
Elbit tailors and adapts its technologies, integration skills, market
knowledge and battle-proven systems to each customer's individual requirements
in both existing and new platforms. By upgrading existing platforms with
advanced electronic and electro-optic technologies, Elbit provides customers
with cost-effective solutions, and the customers are able to improve their
technological and operational capabilities within limited defense budgets.
The recent military operations around the world and ongoing terrorist
threats have caused a shift in the defense priorities for many of Elbit's major
customers. While Elbit continues to perform platform upgrades, more emphasis is
being placed on ISR, including information systems, intelligence gathering,
border and perimeter security, UAVs, space and satellite-based defense
capabilities and homeland security issues. Elbit believes that its existing
systems, products and capabilities position us to meet emerging customer
requirements in many of these areas.
Elbit Systems' shares are traded on the NASDAQ under the symbol "ESLT"
and on the Tel-Aviv Stock Exchange (TASE).
Our investment in Elbit is presented in our consolidated financial
statements by the cost method for Israeli GAAP purposes, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore Elbit's
results are not included in our results of operations.
Our Agrochemicals Business
Our affiliated company, Makhteshim-Agan Industries Ltd., or MA
Industries, operates in the agrochemicals business through its direct and
indirect subsidiaries.
23
As of December 31, 2005, our principal affiliated companies in the
agrochemicals business were:
Percentage
Of Equity
Ownership Principal Products and Services
------------ -------------------------------------------------
Makhteshim-Agan Industries Ltd. 31.5(1)(2) Holding Company
Makhteshim Chemical Works Ltd. 100.0(3) Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd. 100.0(3) Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A. 100.0(3) Formulation and distribution of crop
protection chemicals
Lycored - Natural Products Industries Ltd. 100.0(3)(4) Natural Products and Food Additives
________________
(1) The ordinary shares of MA Industries are traded on the Tel Aviv Stock
Exchange, or TASE.
(2) After the balance sheet date, we acquired a total of 6,920,565 shares of MA
Industries, and MA Industries acquired 24,875,703 of its own shares, which,
upon the conversion of convertible debentures and the exercise of stock
options including employee stock options, increased our interest in MA
Industries to approximately 33.7% as of June 30, 2006 (approximately 32.5%
on a fully diluted basis taking into consideration the exercise of
outstanding stock options and the conversion of outstanding convertible
debentures).
(3) Indicates the percentage of direct ownership by MA Industries.
(4) In 2005 Lycored granted stock options to employees, which, if exercised,
will dilute MA Industries direct ownership in Lycored to approximately
91.84%.
MA Industries is the world's leading generic manufacturer of crop
protection products. After a long period of coordination and cooperation as
separate publicly-traded entities, Makhteshim and Agan formally merged in May
1998. The new MA Industries replaced its predecessors on the Tel Aviv Stock
Exchange and now has several wholly-owned subsidiaries which include Makhteshim
Chemical Works Ltd., or Makhteshim, Agan Chemical Manufacturers Ltd., or Agan,
and Milenia Agro Ciensias S.A., or Milenia, all of which are collectively
referred to as "the MA Group." These companies are leading international
suppliers of generic crop protection products. The MA Group produces a full
range of crop protection chemicals, including acaricides, insecticides,
fungicides, herbicides as well as plant growth regulators. The company is also
engaged in the development, production and marketing of fine chemicals,
intermediates, specialty aroma chemicals, industrial chemicals, antioxidants and
nutraceuticals.
The Agrochemicals Business Environment in 2005
After several years in which the agrochemicals market underwent
significant structural changes, recovery in the past three years has been
indicated by increased demand for plant protection chemicals and improved
business results of most companies. In 2005, the agrochemical market increased
by 1.9%, reaching 31.3 billion dollars, compared with 30.7 billion dollars in
2004.
The agrochemicals market has become more concentrated since the recent
years' trend of mergers of the multinational companies. At present, six large
companies hold approximately 71% of the conventional agrochemicals market. This
process of consolidation has led to large gaps between the two leading companies
- Syngenta and Bayer - and the rest of the companies.
24
In the short-to-medium term, the process has stabilized the market by reducing
the number of competitors and has tempered the falling prices.
Crop Protection
Generic agrochemicals offer an alternative source for widely utilized
chemicals previously manufactured under patents by larger research-based
chemical manufacturers. Research-based chemical manufacturers often focus their
resources on developing new agrochemicals and supply of additional chemicals by
generic manufacturers, such as MA Industries, to supplement their capacity. In
the next few years, as a result of decreased resources committed to research and
development of new agrochemicals products and the expiration of existing
patents, a significant number of widely used agrochemicals are expected to lose
patent protection in many geographic regions (primarily South America),
substantially increasing the available market for sales by generic
manufacturers. The off patent component of the agrochemical industry grew in
recent years to approximately 69% as of December 31, 2005 and is expected to
exceed 70% of the agrochemical market by 2007. In addition, the modernization of
the agricultural industries of Eastern Europe and other developing countries
offers increasing sales opportunities for both research-based and generic
agrochemical manufacturers.
The major competitors in the international market for agrochemicals are
major international research-based chemical producers. These major international
chemical producers have significant influence on the prices of most of MA
Industries' products. In the Israeli market, MA Industries competes with
importers with respect to most of its products, and competes with both importers
and Israeli producers with respect to non-pesticide products.
The development of new generic products requires significant investment
for research, registration, establishment of production and marketing
facilities. The MA Group typically focuses on products that require a high
degree of sophistication in process development and production, and are,
therefore, less susceptible to extensive competition. Their prices, therefore,
tend to be relatively higher than sectors where competition is more prevalent.
For many of these products, the MA Group is the world's second largest
manufacturer, with the original research-based chemical company maintaining the
majority share. We believe that the MA Group's ability to compete with major
international research-based chemical companies and other generic chemical
manufacturers is based upon their flexible manufacturing facilities, advanced
research and development capabilities, fulfillment of stringent registration and
licensing requirements of various countries, compliance with environmental
regulations, material purity and worldwide marketing and cooperation with
certain multinational companies with respect to the production and marketing of
numerous products. An essential component of the MA Group's ability to maintain
its market share on the worldwide market is the successful introduction of new
generic products immediately after the expiration of the patents validity. In
1998, an amendment was passed to Israeli Patents Law 1967, which has certain
beneficial ramifications for the Israeli agrochemical industry. Under this
amendment, (i) subject to certain conditions, research activities on a patent
during the patent period for the purposes of production deployment after the
patent expiration will not constitute misuse of an invention, and (ii) the
period of patents in the agrochemical industry cannot be extended. These changes
should facilitate the introduction of new products by the MA Group.
25
The MA Group plans to develop, over the next several years additional
agrochemical products, including fungicides, insecticides and herbicides, based
primarily on a substantial number of patents held by other parties expiring
within the next few years. The MA Group purchased the right to manufacture and
market several agrochemical products from the developers of such products.
New research and developments in the field of trans-genetic plant
species that can tolerate insects and in plant species that are resistant to
fungal diseases may have an adverse impact on the demand for the MA Group
products during the next few years, depending upon the success of such
developments.
The MA Group markets its crop protection chemicals primarily to
national distributors and foreign manufacturers, who use such chemicals in the
formulation of a wide range of products and sell the formulations to
distributors and end users. The MA Group manufactures over 80 different active
ingredients, which are sold as technical grade materials and "ready"
formulations. These technical grade materials are used in the formulation of a
wide range of herbicides, insecticides, fungicides and plant growth regulators.
The "ready" formulations are sold to distributors. Agan sells its synthetic
aroma chemicals principally to the detergent, soap and cosmetics industries. No
single product manufactured and sold by the MA Group accounted for more than 10%
of MA Industries' total sales in 2005 and 2004.
Foreign Activities
As part of MA Industries' strategy to focus on its core businesses and
increase market penetration in the agrochemicals industry, it has continued to
expand its agrochemicals business abroad.
In October 2001, MA Industries and several of its subsidiaries entered
into a securitization transaction, pursuant to which the subsidiaries agreed to
sell all their accounts receivable to several foreign companies which were
established for this purpose, but which are not owned or controlled by MA
Industries or its subsidiaries. The acquisition of the accounts receivable by
these companies was financed by a United States affiliate of the Bank of America
Group. On September 28, 2004, MA Industries and certain subsidiaries signed an
agreement with Bank of America to terminate the securitization undertaking. On
that same date, they entered into a new agreement with Rabobank International
for the sale of trade receivables in a securitization transaction to replace the
previous agreement with Bank of America. The new agreement is similar in
principle to the prior agreement with several changes, including, among others,
that in the new agreement additional MA Industries subsidiaries are included in
the transaction. The volume expected to be at the disposal of the companies
purchasing the accounts receivable is approximately $250 million (compared with
$150 million in the previous securitization agreement), on a current basis, so
that the considerations received from the customers whose debts were sold will
be used to purchase new debts. Under the terms of the securitization agreements,
MA Industries will handle collection of the sold debts for these companies in
consideration of a fee, which is to be determined in accordance with such
agreements. The period in which the companies will sell their trade receivables
will be one year from the closing date of the transaction. This period may be
extended, with the consent of all the parties, for additional one-year periods,
up to a maximum of four extensions. Under the terms of the agreement, MA
Industries undertook to meet certain financial covenants, mainly a ratio of
26
liabilities to capital and profitability ratios, and as of December 31, 2005 and
March 31, 2006, MA Industries was in compliance with these covenants. As of
December 31, 2005, MA Industries received cash proceeds of approximately $146.5
million from this securitization transaction, as of March 31, 2006, the MA
Industries received cash proceeds of $202.1 million.
In April 2004, MA Industries, through a wholly-owned subsidiary, signed
agreements to acquire ownership and control in a group of three companies,
Vegetation Management LLC, Farm Saver.com LLC and Nation Ag II LLC, which are
engaged in the registration, import and marketing of agrochemicals in the U.S.
The total purchase price amounted to approximately NIS 303 million.
In June 2004, MA Industries, through a wholly owned subsidiary, signed
an agreement for acquisition of approximately 45% of the rights in Control
Solutions Inc., or CSI, a U.S. company engaged in the marketing of pesticides to
the non-agricultural market in the United States. In addition, the subsidiary
was granted an option, which may be exercised at any time during the next three
years, to increase its share in CSI to 60%, in exchange for a payment ranging
between NIS 6.8 million and NIS 47.8 million, based on CSI's earnings in
2004-2006. In addition, commencing in 2009, the subsidiary and the remaining
shareholders of CSI have the right to require the subsidiary to acquire from the
remaining shareholders of CSI the balance of their shares in CSI in
consideration for an amount to be determined based on the earnings of CSI for
the three years preceding the acquisition date. In October 2005 the wholly owned
subsidiary exercised its option to increase its share in CSI, and thus increased
its holdings to 60%. Accordingly the company was fully consolidated as from
October 2005.
In July 2004, MA Industries, through a wholly owned subsidiary, signed
an agreement for acquisition of all the shares and rights of Farmoz PTY Limited,
an Australian company engaged in the marketing and distribution of pesticides in
Australia.
In August 2004, MA Industries, through a subsidiary, signed an
agreement for acquisition of 50.1% of the rights in RiceCo LLC, a U.S. company
engaged in the development and marketing of herbicides for rice.
The total purchase price paid for CSI, Farmoz and RiceCo amounted to
approximately NIS 186 million.
In January 2005, MA Industries, through a wholly owned and fully
controlled subsidiary, completed the acquisition of 49% of the shares of
Makhteshim Agan Benelux & Nordic B.V. (hereinafter - Mabeno), which acts as the
exclusive distributor of plant protection products in the Benelux area and
Scandinavia. Pursuant to the agreement, the consideration was paid in 693
thousand of MA Industries' shares held by the subsidiary. The subsidiary was
granted an option, exercisable at any time, to increase its share in Mabeno to
55%.
In April 2005, MA Industries, through wholly owned and fully controlled
subsidiaries, acquired 70% of the shares of Biomark Tradinghouse Co.
(hereinafter - Biomark), which engages in the marketing of plant protection
materials in Hungary. MA Industries received an option to purchase the balance
of the shares of the company in the future, and thereby to increase its holdings
to 100%.
27
The cost of acquiring the 49% in Mabeno and 70% in Biomark, including
the cost of exercising the option to increase the rate of holding in CSI
amounted to $ 12.6 million.
On February, 2005, MA Industries', through a wholly owned subsidiary,
signed a long term joint supply agreement with Bayer CropScience LP for the
marketing of Tebuconazole in the USA (product sold under the name "Orius" which
is the brand name under which MA Industries sells Tebuconazole in many other
parts of the world). Tebuconazole ("Orius") is a fungicide which is intended to
treat a wide variety of diseases in a large number of economically important
crops such as cereals, grapes, peanuts, fruit trees and vegetables. But it is
important mainly due to its being a leading product, proven to be particularly
effective in treating Asian wheat rust in soy plants, which has spread
throughout South America. Initial signs of the disease were discovered last
season in nine US states. The US EPA has recently approved Tebuconazole for use
on soy against Asian wheat rust, in particularly speedy proceedings (section
18), in view of the possibility that there might be an outbreak of the disease
in the coming season in the USA.
On April, 2005, MA Industries, through a wholly owned subsidiary,
signed a long term strategic supply agreement with the multinational
agrochemical firm Bayer CropScience ("Bayer"). The agreement relates to the
insecticide called Imidacloprid, which is protected in most countries around the
world by patents owned by Bayer. Under the agreement, Bayer is to provide MA
Industries' subsidiary with Imidacloprid in order for the subsidiary and other
companies in the MA Group to sell it to the MA Group's customers around the
world, in the area of agrochemicals and in other areas. The agreement affords MA
Industries' the right to rely on the licensing files of Imidacloprid, owned by
Bayer, in various countries. The date of access to Bayer's licensing data is
different in each country: in some countries access can already be allowed now,
while in other countries, it will be available in the future. Imidacloprid is an
insecticide with a broad range of uses on more than 140 different crops, and is
one of the most important insecticides currently sold around the world. The
product is sold in more than 100 countries. MA Industries is unable, at this
stage, to anticipate the international market share for the product that it may
grab, or the expected profits from such, but it estimates that if it is
successful in marketing the product, the product might have a substantial effect
on its operations. The execution of this agreement is another step in
realization of MA Industries' strategy of expanding its basket of products, and
strengthening its ties with leading multi-national companies in the field of
crop protection products.
Recent Developments
On November 14, 2005, MA Industries Board of Directors decided to adopt
a policy according to which the MA Industries will act to buy back its own
shares in the amount of $150 million. The decision of the Board of Directors
provides different parameters for acquisition of the shares including, among
others, acquisition in response to supply without creation of demand,
limitations on the scope of daily acquisitions, price criteria and execution of
off-market transactions. The shares acquired will become dormant shares as long
as they are held by MA Industries. As at the balance sheet date, MA Industries
holds 12,018,603 of its own shares,
28
constituting approximately 2.6% of its total issued and paid-up share capital
in the amount of $65.6 million. As at June 30, 2006, MA Industries holds
24,875,703 of its own shares.
On April 23, 2001, MA Industries' Board of Directors resolved to adopt
a dividend policy at rates of between 15% and 30% of annual net income,
beginning from 2001. In accordance with this policy, an interim quarterly
dividend will be distributed. The amount of the dividend will be calculated
according to the net income for the quarter and will be within the limits
specified above. This interim dividend will be considered as an advance on
account of the annual dividend. Application of policy is subject to there being
sufficient income for distribution on the relevant dates, to the provisions of
any law regarding dividend distribution, to specific decisions of MA Industries'
Board of Directors in respect of each distribution and to any other decision the
Board of Directors is permitted to make at any time, including regarding a
different designation of MA Industries' earnings and a change in this policy. On
March 8, 2006, MA Industries' Board of Directors decided to make a change
regarding the dividend distribution policy, such that commencing with the fourth
quarter of 2005, a dividend will be distributed at the rate of 50% of the net
earnings for the period. In March 2005, MA Industries' Board of Directors
decided to distribute a dividend in respect of the earnings of 2004, in the
amount of $12,700 thousand. During 2005, MA Industries' Board of Directors
decided to make four interim dividend distributions, in the total amount of US$
60,200 thousand. Subsequent to the balance sheet date, MA Industries' Board of
Directors resolved to distribute a dividend in respect of the earnings of the
fourth quarter of 2005, in the amount of $23,500 thousand.
Our Venture Capital Business
In January 2000, we and a wholly-owned subsidiary established a
registered partnership called "Koor Corporate Venture Capital," or Koor CVC,
within which we concentrated our investment activities in venture capital funds
and in high-tech start up companies with growth potential. The action was taken
to implement our strategic decision to increase our investments in those areas.
Within this context, since January 2000, Koor CVC signed investment agreements
with various start-up companies.
In 2000, Koor CVC, as a limited partner, also committed to invest up to
a total of $73 million in a number of external venture capital funds. As a
result of the reduction in the size of one of the funds, this commitment
declined to approximately $68 million in 2002.
In March 2001, Koor's board of directors elected to limit Koor CVC's
future investments only to its current portfolio companies and not to seek new
investments from that point onwards.
In June 2003, Koor CVC sold most of its commitment to its portfolio of
external venture capital funds to a secondary venture capital fund. As a result
of this sale, Koor CVC's future commitment to invest in these venture capital
funds was reduced to $14 million.
In December 2005, Scopus Video Networks ("Scopus") a portfolio company
of Koor CVC issued its shares to the public on NASDAQ based on a post-IPO
company value of $92 million. Following the IPO Koor CVC holds 23% on an as -
converted basis, and 18% on a fully
29
diluted basis. As a result of the IPO, Koor CVC recorded a capital gain to the
amount of $7 million in the fourth quarter of 2005.
In addition, in the fourth quarter of 2005, Koor CVC signed a series of
agreements, executed in 2006, for the sale of its stake in portfolio company
Mysticom to Transwitch Corporation.
As of December 31, 2005, Koor CVC's future commitment to invest in its
venture capital fund (Pitango) totaled approximately $2.3 million. This amount
may be drawn upon by the fund at any time over the next 1-3 years, based upon
their needs.
During 2005, Koor CVC recorded total provisions of $15 million, net of
the $7 million capital gain following the Initial Public Offering of Scopus.
These provisions were as a result of impairment in value for some of the Koor
CVC portfolio companies and portfolio fund.
During 2005, Koor CVC transferred approximately NIS 15 million ($3.3
million) in follow-on investments in its portfolio start-up companies and its
portfolio venture capital funds.
As of December 31, 2005, the book value of Koor CVC's investments in
its start-up companies, a venture capital fund and Scopus Network Technologies,
totaled approximately NIS 166 million ($36 million).
Our Other Businesses
We have an interest in several service industries, mainly tourism, real
estate, aviation and trading. In previous years, our "other businesses" segment
also included construction and infrastructures, electrical appliances, software,
food, consumer products and metal products, as well as the production of
batteries.
As of December 31, 2005, the principal companies in our other
businesses segment were:
Percentage
Of Equity
Ownership Principal Products and Services
------------ -------------------------------
Sheraton Moriah (Israel) Ltd. 55.0 Hotel chain
Knafaim-Arkia Holdings Ltd. 9.2(1) Aviation and tourism services
Koor Properties Ltd. 100.0 Real estate
Koor Trade Ltd. (2) 100.0 International trade
(1) Not consolidated in our financial statements and not included in our
business data. The ordinary shares of Knafaim are traded on the TASE.
(2) As described below, on May 28, 2006, we sold our entire interest in Koor
Trade Ltd.
Tourism
Our interests in Israel's tourism industry include ownership and
management of hotels and resorts, and other tourism-related services,
such as airlines. For the years ended December
30
31, 2005 and 2004, our tourism business had sales of NIS 526 million ($114
million) and NIS 430 million ($93 million), respectively.
Sheraton Moriah (Israel) Ltd. (Sheraton Moriah)
The Sheraton Moriah hotel network consists of 2,201 rooms (1,724 under
100% ownership) in 8 owned or leased hotels in major tourist destinations in
Israel, operating under the following brand names: Sheraton (six hotels), Luxury
Collection (one hotel) and Four Points (one hotel).
Following the continuous crisis due the escalation of violence in
Israel since October 2000, since April 2003, a positive trend has developed in
the incoming tourism market. Tourist entries are still 30% less than 2000, but
the improvement is consistent. As a result of the environment, Sheraton Moriah's
management has continued its strict control on expenses while emphasizing
revenue enhancement, including focusing on direct sales via a local central
reservations office, hard-sale local web-site, and leverage of its international
brand to increase the market share in both the domestic tourism and incoming
tourism markets.
Recent developments
During the first quarter of 2006, Sheraton completed the purchase of
the remaining 50% of the shares of Yehuda Hotels Ltd., for consideration of NIS
55 million.
Knafaim-Arkia Holdings Ltd. (Knafaim)
On September 29, 2004 we signed two agreements to sell 16% of the
shares of Knafaim for approximately NIS 121 million, and a third agreement for
the sale of an additional 3% of the shares of Knafaim for approximately NIS 23
million. As a result of these sales, our shareholding in Knafaim decreased from
approximately 28.3% to approximately 9.2%. Accordingly, for Israeli GAAP
purposes, the investment in Knafaim is stated by the cost method, beginning from
the date of the sale, and is classified as available-for-sale under FAS 115 for
U.S. GAAP purposes. In the statement of operations for 2004, we recorded a gain
of NIS 51 million. Since we intend to sell the remainder of the shares in
Knafaim, the investment is presented within current assets.
Knafaim was incorporated in 1980. Knafaim owns a variety of businesses
in the travel and tourism industry, primarily 39.5% of El-Al Israel Airlines
Ltd., Israel's international airline. Knafaim also holds other companies that
supply various tourism services, both domestically and internationally and
companies that purchase and lease back aircraft.
Real Estate
Tadiran's Real Estate
In March 2002, Tadiran's real estate was transferred to us as a
liquidating dividend. In 2003, we sold most of the real estate assets to a group
of investors headed by Denisra International Ltd. and Ranitech Ltd for
consideration of approximately NIS 273 million, and we recognized a capital gain
of approximately NIS 29 million. As a result of the sale of this real
31
estate, we realized a tax reserve of approximately NIS 44 million, created in
respect of those assets, and we paid taxes of approximately NIS 40 million.
The remaining balance of the real estate assets we received from
Tadiran, amounts to approximately NIS 42 million as at December 31, 2005.
Koor Properties Ltd. (Koor Properties)
Koor Properties, our wholly-owned subsidiary, owns and develops
directly and indirectly real estate in Israel. As of December 31, 2005, Koor
Properties owned directly and indirectly an aggregate of approximately 52
thousand square meters of real property in different stages of development. Most
of the land is commercially developed.
Trade
Koor Trade Ltd. (Koor Trade)
Koor Trade, our wholly-owned subsidiary, imports, exports and
distributes a broad range of industrial, agricultural and consumer products
through its worldwide network of offices, including offices in Europe, Asia,
Latin America and Australia. For the years ended December 31, 2005 and 2004,
Koor Trade had sales of NIS 157 million and NIS 112 million, respectively. Koor
Trade owns a 49% equity interest in Balton C.P limited (Balton), an English
international trading company, which is engaged in trading activities in seven
countries in Africa relating to agricultural, telecommunications,
electromechanical and air-conditioning equipment, construction and other
projects.
During August 2005, a valuation was conducted in respect of Balton, in
order to examine the necessity of writing down the value of Balton in the
financial statements of Koor Trade. The valuation was performed by an
independent external expert and as a result, Koor Trade included loss from
impairment in value of approximately NIS 44 million in 2005.
In 2005, our Board of Directors granted our management the authority to
sell our entire holding in Koor Trade. Therefore the activities of Koor Trade
were classified in our financial statements for the year ended December 31, 2005
as discontinued operations. We recorded a provision in the amount of
approximately NIS 20 million for impairment in value of its investment in Koor
Trade, based on indicators relating to the fair value of the investment,
including a valuation by an external valuation expert. See Note 24(2) to the
consolidated financial statements included elsewhere in this annual report.
On April 25, 2006 we signed an agreement for the sale of our entire
holding in Koor Trade to a group of managers, including one of our senior
executives, for $8.3 million. The transaction was completed on May 28, 2006, and
the entire cash proceeds of $8.3 million were received.
Suppliers
The companies engaged in our businesses purchase the materials and
components used in their products from numerous independent suppliers. These
materials and components are not
32
normally purchased under long-term contracts. Most of the items purchased by
these businesses are obtainable from a variety of suppliers, and such
businesses normally maintain alternative sources for major items. In some cases
these companies have annual purchasing agreements with their major suppliers,
which establish prices, quality thresholds and delivery schedules.
To date, our businesses have not experienced any significant difficulty
in obtaining timely delivery of supplies, and management believes these
businesses maintain adequate inventories of certain significant imported
components. However, with respect to certain components, there may be a lengthy
period of preparation for production and adaptation for our businesses'
requirements. Accordingly, short-term shortages may arise in the event that
these companies were required to change suppliers without advance planning. The
unavailability of such components during such change-over period could result in
production delays, which might adversely affect our business.
Research and Development
As of December 31, 2005, most of our research and development
activities are conducted by our affiliated companies in our telecommunication
equipment, venture capital investment and agrochemicals businesses, and research
and development activities at our subsidiaries are minor. These affiliated
companies are actively engaged in research and development programs intended to
develop new products, manufacturing processes, systems and technologies and to
enhance existing products and processes. Research and development is funded by a
combination of our own resources and grants from the Israeli Government. We
believe our research and development effort has been an important factor in
establishing and maintaining our affiliates' competitive position.
Our affiliates' updated research and development efforts have resulted
in an increase in the sales of internally designed products. We believe that
research and development in high technology areas, such as our
telecommunications equipment and agrochemicals businesses, is important to our
future growth, particularly with respect to products targeted for export
markets. Accordingly, we anticipate that these businesses will account for a
majority of our research and development efforts in the future. As part of their
research and development programs, our affiliates not only seek to develop new
products, but also to apply newly developed technologies to improve existing
products.
In each of the last three fiscal years, our affiliates received grants
from the Government of Israel through the Office of the Chief Scientist, or OCS,
for the development of certain products. Our affiliates generally receive from
the OCS 20% to 66% of certain research and development expenditures for
particular projects. Under the terms of the Israeli Government participation, a
royalty of 2% to 5% of the net sales of products developed from a project funded
by the OCS is generally required to be paid, beginning with the commencement of
sales of products developed with grant funds and ending when 100% to 150% of the
grant is repaid. Our affiliates have paid in the past, and currently pay,
royalties on sales of such products. The terms of the Israeli Government
participation also require that the research and development be conducted by the
applicant for the grant as specified in the grant application and that the
manufacturing of products developed with government grants be performed in
Israel, unless a special approval has been granted. Separate Israeli Government
consent is required to transfer to
33
third parties technologies developed through projects in which the government
participates. Such restrictions, however, do not apply to exports from Israel
of products developed with such technologies. From time to time the Government
of Israel has revised its policies regarding the availability of grants and
participation, and there can be no assurance that the Government's support of
research and development will continue in the future. In addition, in order to
be eligible for the governmental grants, programs and tax benefits, our
affiliates must continue to meet certain additional conditions, including
making specified investments in fixed assets. Should our affiliates fail to
meet such conditions in the future, they could be required to refund grants or
tax benefits, together with interest and inflation adjustments.
Competition
In 2005, the majority of our sales from telecommunications equipment,
defense electronics and agrochemicals businesses were derived from international
sales. The companies comprising these businesses are focusing on developing new
markets to increase international sales. The worldwide marketing of products in
each of these businesses is highly competitive and certain competitors are
substantially larger and have substantially greater financial, production and
research and development resources, more extensive marketing and selling
organizations, greater name recognition and longer selling experience than us.
Some of our competitors are also able to provide their customers with more
direct financing or greater access to long-term, relatively low-cost government
loans to finance equipment purchases.
Patents and Intellectual Property
Several of our subsidiaries and affiliates own and control a
substantial number of patents, trade secrets, confidential information,
trademarks, trade names and copyrights which, in the aggregate, are of material
importance to our business. We are of the opinion that our business, as a whole,
is not materially dependent upon any one of these assets or any related group of
assets. We are also licensed to use certain patents and technology owned and
controlled by others, and other companies are likewise licensed to use certain
patents and technology owned and controlled by us.
In certain limited circumstances, certain of our customers, including
the United States Government, may retain certain rights to technologies and
inventions resulting from our performance as a prime contractor or subcontractor
under certain contracts and may disclose such information to third parties, who
may be our competitors. When in certain limited circumstances, certain of our
customers, fund research and development, they usually acquire rights to data
and title to inventions and we may retain a non-exclusive license for such
inventions. In certain circumstances, some of our customers are entitled to
receive royalties in connection with the sale of products, the development of
which was financed by those entities. However, if one of our customers purchases
only the end product, we normally retain the principal rights to the technology.
34
Regulation
Our diverse businesses are subject to significant statutory and
administrative regulation in the various jurisdictions in which we operate
throughout the world. Among the regulations to which we are subject are those
described below.
Monopoly and Pricing Regulations
We and our subsidiaries or affiliates may be declared monopolies or
otherwise be subject to certain legal obligations and restrictions established
by the Controller or by the Restrictive Business Practices Court, or the Court,
in the event that our market share, or the market share of our subsidiaries or
affiliates, exceeds certain prescribed limits.
Environmental, Health and Safety Matters
General
We are subject to laws and regulations concerning environmental
conditions, product safety, health and safety matters and the regulation of
chemicals in countries where the MA Group manufactures and sells its products.
These requirements include regulation of the handling, manufacturing,
transporting and use and disposal of certain materials, as well as regulation
concerning the discharge of pollutants into the environment. In the normal
course of its businesses, the MA Group is exposed to risks relating to the
possible release of hazardous substances into the environment, which may cause
environmental or property damage or personal injuries. In Israel, where the MA
Group maintains its principal production facilities, losses and damages relating
to continuous environmental pollution are currently uninsurable.
It is the MA Group's policy to comply with environmental, health,
product safety and other safety requirements, and to provide workplaces for its
employees that are safe and environmentally sound, and that will not adversely
affect the health or environment of the communities in which it operates. From
time to time, the MA Group's facilities may be subject to environmental
compliance actions and the resolution of such matters has in the past involved
the establishment of certain compliance programs. Israeli legislation enacted in
1997 amended certain environmental laws by authorizing the relevant
administrative and regulatory agencies to impose sanctions on non-complying
parties, including issuing an order against any person that violates
environmental laws to remove the environmental hazard. In addition, these laws
impose criminal liability on the officers and directors of a corporation that
violates environmental-related laws, and increases the monetary sanctions that
such officers, directors and corporations may be ordered to pay as a result of
such violations. The MA Group has established worker safety programs and
procedures in our plants, which the MA Group believes are reasonable under the
circumstances. The MA Group believes that its experience relating to worker
accidents is generally consistent with industry-wide experience. Furthermore,
the MA Group believes that it is not currently subject to material liabilities
for non-compliance with applicable environmental, health and safety laws,
although there is a risk that legislation enacted in the future could create
liabilities for past activities undertaken in compliance with then-current laws
or regulations. In addition, the MA Group may be held liable for environmental
damage of which it is not presently aware.
35
In addition to the specific matters described below, at a number of
locations at which certain of the MA Group's businesses have conducted
manufacturing operations for many years, it is possible that contamination may
exist as a result of on-site waste disposal, spills, use of wastewater treatment
ponds, or other historical practices. While in recent years, industrial solid
wastes generally have been disposed of at a central State-authorized disposal
facility in Ramat Hovav, this central facility was not available to Israeli
industry during earlier periods of the MA Group's operations. It is unclear
whether any existing conditions on any property owned by the MA Group will
require significant redemption or cleanup in the future, and the MA Group cannot
speculate about the timing or potential costs associated with any such cleanup.
It is possible, however, that material expenditures could be required with
respect to these past practices.
In recent years, the operations of the MA Group's businesses have
become subject to increasingly stringent legislation and regulation related to
occupational safety and health, product registration and environmental
protection. Such legislation and regulations are complex and constantly
changing, and there can be no assurance that such regulatory changes in the
future will not require the MA Group to make significant capital expenditures to
modify, supplement or replace equipment, or to change methods of disposal or
discharge, or the manner in which the MA Group manufactures products or operates
its businesses. In Israel, in particular, the MA Group anticipates that
increasingly stringent requirements will result in substantial expenditures,
particularly for improvements of environmental controls at older facilities. We
have generally adopted, or intend to adopt in our newer facilities,
environmental control standards comparable to those set by the German Technische
Anleitung Luft air emission regulations. These regulations set forth strict
controls on air emissions from industrial facilities. The Israeli government has
looked to these standards as a basis for upgrading its air pollution
requirements and has applied the standards to some, but not all, facilities in
Israel.
We regularly incur capital expenditures and operating costs to comply
with various environmental, health and safety laws and regulations. The costs
related to environmental matters may increase significantly in the future if the
implementation of new environmental standards in Israel is more rapid or
stringent than currently anticipated by us, or if contemplated pollution control
measures do not achieve the desired results.
Agrochemical Industry
The distribution and use of agricultural chemical products, including
crop protection chemicals such as those produced by the agrochemicals business,
are regulated in most parts of the world, and require extensive testing, quality
control and compliance with registration procedures. The strictest standards are
applied in the United States, where the Environmental Protection Agency, or EPA,
is the leading regulator, and in Japan and Western Europe. The granting of a
registration involves consideration of health, safety and environmental issues,
as well as the performance and benefits of the product. The registration for an
agricultural chemical product in the U.S. and in Western Europe is often subject
to data call-in or process. Usually, updating the registration necessitates the
submission of additional data by the MA Group, our agrochemical division.
Re-registrations, which permit the continued sales of pesticides for an
additional period, are frequently granted as a matter of course, subject to
compliance during the term of the registration period. While the MA Group is not
aware of any immediate intent to
36
cancel any of its registrations, there can be no assurance that the MA Group
will not face a revocation process or encounter difficulties in renewing the
registrations for its products for additional periods.
From time to time, some of the MA Group's agrochemical products are
subject to legislative or other initiatives to curtail or regulate their use due
to environmental, health or safety concerns.
Registration expenses (according to US GAAP) for the MA Group in 2005
were $37 million compared to $17 million in 2004, $12 million in 2003 and $33
million in 2002. The MA Group believes that its registration expenditures in the
future will increase, based on the stricter standards that are expected to be
applied in countries where the MA Group sells its products and the likelihood
that MA Group will purchase additional products from competitors on the
agrochemical industry. As a result of the foregoing developments and
obligations, virtually all of the MA Group's businesses in recent years have
spent significant amounts on operation and maintenance, as well as under capital
programs to address increasingly stringent requirements with respect to
environmental, safety, and health protection concerns.
Most of the manufacturing activities of the MA Group take place at the
two production facilities in Israel. The board of directors of MA Industries
appointed an Ecology Committee to receive regular reports from all the
subsidiaries where manufacturing takes place (Israel, Brazil, Colombia, Greece
and Spain). The subsidiaries control the environmental issues pertinent to their
particular products, which differ from site to site and from country to country.
The investment in meeting environmental standards amounted to about $19 million
in 2002, $23 million in 2003, $24 million in 2004 and $29 million in 2005, and
it is estimated that the annual investment in the coming years will exceed those
of the prior years, including expenditures as described below.
One of MA Industries' plants is located in the Ramat Hovav industrial
zone. The Ramat Hovav Industrial Council has been required to take intensive
action to prevent odor nuisances, the source of which is the evaporation ponds
in the Ramat Hovav industrial zone.
The industrial wastes of the plants, after pre-treatment at the plants,
are transferred to the responsibility of and for further treatment by the
industrial council. This arrangement has been in effect since the industrial
zone in Ramat Hovav was built at the end of the 1970s. In 1998-99 the council
erected and operated a biological installation for industrial wastes, to reduce
the biological load of industrial wastes before piping them to the evaporation
ponds.
The industrial council was directed by the Ministry of Environmental
Protection to make arrangements to end the piping of the industrial wastes to
the evaporation ponds, no later than June 30, 2006. In addition, the Ministry of
Environmental Protection stated that on that date, the quality of the wastes
must meet a minimum level of Total Organic Carbons, Carbon Oxygen Demand and
Biological Oxygen Demand, or TOC, COD and BOD, respectively. The industrial
council adopted a significant resolution in principle to change its operations
so that each plant in the industrial zone is required to treat its own wastes in
order to reduce the biological load and attain new required standards.
Furthermore, the plants are required to reduce the plant BOD levels by June 30,
2006.
37
Each of MA Industries' plants in Ramat Hovav makes preparations to
treat its own wastes. In order to comply with the TOC, COD and BOD standards, a
biological treatment installation will have to be built, as well as additional
upstream pre-treatment installations. MA Industries has hired the professional
services of entities of proven experience in the chemicals industry in Germany
and Switzerland, and believes it can achieve the correct technological solutions
for an amount of between $30 million and $35 million. The short-term
requirements for BOD are currently being clarified and the options discussed,
between the plant, the industrial council and the Ministry for Environmental
Protection.
During recent years, the MA Group has invested consistently and
regularly in all its plants, in Israel and abroad, to improve standards relating
to the quality of the environment, and its plants have been awarded the
President's Prize as well as commendations from the Ministry for Environmental
Protection in the last few years. MA Industries is in compliance with ISO-9001
and ISOP-14,001 (environment) and with OHSAS 18,000 (safety). The production
sites at Ramat Hovav and Ashdod in Israel have been operating in compliance with
ISO 14.001 since that standard was approved by the Israel Institute of Standards
in 1997. Compliance with the standard requires the senior management to
formulate an environment policy and develop a program for its implementation. In
addition, in 1998 the MA Group also adopted the German standard Ta Luft (air
pollution) at its Ramat Hovav and Ashdod sites.
Over the past several years various tests have been performed by
different agencies to test the ground contamination in the Ramat Hovav area as
well as the area surrounding the subsidiary's premises in Be'er Sheva. As of
December 31, 2005, MA Industries' management did not expect a significant impact
with respect to MA Industries from implementation of the report's
recommendations, and, therefore, no provision has been included in the financial
statements.
In May 2004, a subsidiary of MA Industries owning plants at the Ramat
Hovav site, received notice of a change in the terms of its business license,
pursuant to which the plants were required to change the method used to treat
sewage from the existing treatment, and to do so independently through the
implementation of vaporization processes. These terms include demands that,
within a short period of time, the plants conduct research and development for
the purpose of customizing the process to the composition of each plant's
sewage, and later, to build a suitable facility. Additionally, formulation
processes are to be implemented, whereby the plants must present the Ministry of
Environmental Protection with a research and development program for the purpose
of implementing the process with respect to the sewage. At the same time, the
Ministry of Environmental Protection set January 1, 2008 as the date by which
the plants must treat the sewage in the requisite format and to stop the flow of
sewage into the Ramat Hovav Industrial Council's vaporization pools and
treatment facilities. On November 28, 2004, based on these terms, the Israeli
government reached a decision approving a plan to reduce air and water pollution
deriving from the Ramat Hovav industrial area. The plan calls for, among other
things, (i) more restrictive rules regarding the treatment of sewage by the
plants in the area (derived from the additional business license conditions that
are the subject of the administrative appeal described above) to be complied
with in two stages, the first by June 30, 2006 and the second by December 31,
2007; (ii) the drying and rehabilitation of the vaporization pools in the area
by the Ramat Hovav Industrial Council, to be completed no later than December
31, 2012; and (iii) the formulation and implementation by the Ministry of
Environmental Protection of a
38
plan to prevent exceptional emission of hazardous materials into the air from
the Ramat Hovav industrial area.
On October 10, 2004, a subsidiary of MA Industries, together with the
Israel Manufacturers Association and other companies, filed an administrative
petition with the Beer Sheba District Court against the Ministry of
Environmental Protection. The subject of the petition is the additional
conditions for obtaining a business license described above. In the petition,
the District Court was asked to issue an order declaring that the additional
terms are nullified. In March 2005 the Court approved the mutual agreement of
the parties to try to end the dispute by way of meditation.
In the estimation of MA Industries' management, based on advice of its
legal counsel, in view of the current stage of the process, it is probable that
the process will succeed and as a result the additional conditions to the
business license will be modified and reasonable to implement. On June 15, 2006
the parties to the mediation agreed, principally, on a solution to the
controversy aforementioned. According to that understanding, the Ministry of
Environment is supposed to publish, in the near future, new terms to the
business license to industries in the Ramat Hovav area that will replace the
existing conditions. However, in case the mediation fails and the petition is
dismissed, it will have a material effect on the activities of the plant in
Ramat Hovav and/or will require investments of amounts that MA Industries'
management is unable to estimate at this time.
In November 2004, the Board of Directors of MA Industries approved a
master plan for investments in environmental matters as they relate to the
manufacturing sites in Israel. This included approval of investments of
approximately $60 million during the period from 2005 through 2008, the
implementation of which will depend on numerous factors, such as environmental
conditions and technology feasibility studies for the sites), some of which are
beyond MA Industries' control and there is therefore no certainty that they will
take place.
In August 2003, a criminal complaint was filed against MA Industries
and one of its officers by the Man, Nature and Law Foundation. The complaint
alleges that in several instances from 1999 to 2003, there were measurements at
MA Industries' Ramat Hovav plant of stack emissions of materials exceeding the
permitted concentrations, and that such emissions created strong air pollution.
MA Industries believes the charges in the complaint are without merit and
intends to defend itself against such charges. In the opinion of MA Industries'
management, based on advice from its legal counsel, due to the early stage of
the proceedings, it is not possible to estimate the outcome of the complaint
and/or the resultant exposure. Therefore, the financial statements do not
include a provision in respect of the proceedings.
Organizational Structure
The following is a list of all of our significant subsidiaries,
affiliates and other companies in which we have invested as of December 31,
2005, including the name, country of incorporation or residence, proportion of
ownership interest and, if different, proportion of voting power held.
39
Country of Percentage Percentage of voting
Incorporation or of ownership power (if different
Name of Subsidiary/Affiliate residence interest from ownership)
------------------------------- ----------------- ------------ ---------------------
Koor Corporate Venture Capital Israel 100% N/A
Makhteshim-Agan Industries Ltd. Israel 31.5%(1) N/A
ECI Telecom Ltd. Israel 29.7% N/A
Telrad Networks Ltd. Israel 61.0% N/A
ECtel Ltd. (2) Israel 14.8% N/A
Sheraton Moriah (Israel) Ltd. Israel 55.0% N/A
Knafaim-Arkia Holdings Ltd. Israel 9.2% N/A
Koor Trade Ltd. (3) Israel 100% N/A
_____________________
(1) After the balance sheet date, we acquired a total of 6,920,565 shares of MA
Industries, and MA Industries acquired 24,875,703 of its own shares, which,
upon the conversion of convertible debentures and the exercise of stock
options including employee stock options, increased our interest in MA
Industries to approximately 33.7% as of June 30, 2006 (approximately 32.5%
on a fully diluted basis taking into consideration the exercise of
outstanding stock options and the conversion of outstanding convertible
debentures).
(2) As a result of the distribution of ECtel shares by ECI to its shareholders
on June 29, 2006, as described above, our interest in ECtel Ltd. increased
to 19.2%.
(3) As described above, on May 28, 2006, we sold our entire interest in Koor
Trade Ltd.
Property, Plants and Equipment
Our headquarters are located in 2,785 square feet of leased office
space on the top floor of the Telrad building at 14 Hamelacha Street, Rosh
Ha'ayin, Israel.
We own an aggregate of 18,000 square feet of office space in the
Platinum Building in Tel Aviv, where our headquarters were previously located.
We purchased this facility in 1998 and since January 1, 2004, this property has
been sublet in its entirety.
The manufacturing facilities of our subsidiaries and affiliates are
located throughout Israel. Major concentrations are in the Be'er Sheva/Ramat
Hovav area in the south of Israel and the Tel Aviv-Petach Tikva-Lod-Ashdod area
in the central part of Israel. We own our major manufacturing plants,
facilities, machinery and equipment. In addition, we lease certain manufacturing
and office facilities.
Most of the industrial land utilized by us is under 49-year leases from
the Israel Lands Authority with options for an additional 49 years in a
significant number of cases. Land rent on uncapitalized leases is generally
equal to 4% of the value of the land per annum and is subject to revaluation
every seven years.
Item 4A. Unresolved Staff Comments
-------------------------
Not applicable.
40
Item 5. Operating and Financial Review and Prospects.
--------------------------------------------
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this annual report. Our financial statements
have been prepared in accordance with Israeli GAAP, which differ in significant
respects from U.S. GAAP. See Note 29 to our consolidated financial statements,
included elsewhere in this annual report, for a description of the principal
differences between Israeli GAAP and U.S. GAAP as they relate to us.
In accordance with amendments to Israeli GAAP published in October 2001
and December 2002, our financial statements for the years ended December 31,
2004 and 2005 are no longer adjusted to reflect the effects of inflation. For
all financial reporting periods until December 31, 2003, Israeli GAAP required
that our consolidated financial statements recognize the effects of inflation.
Consequently, financial data for all periods until December 31, 2003 in our
consolidated financial statements and throughout this annual report, except as
otherwise noted, have been adjusted to reflect changes in the Israel consumer
price index, or CPI, and have been restated in NIS in terms of the purchasing
power as of December 31, 2003. The functional currency of certain of our
subsidiaries and affiliated companies (mainly MA Industries and ECI) is the US
dollar and their financial statements are prepared in US dollars, and are
translated into NIS using the exchange rate prevailing at the end of the period
for balance sheet items and the exchange rate prevailing on the transaction date
for income and expense items. See Notes 2B and 2D to our consolidated financial
statements included elsewhere in this annual report.
Transactions among our subsidiaries and affiliates and transactions
between our company and our subsidiaries and affiliates are entered into on an
arm's-length basis and, in management's opinion, generally on terms no less
favorable than those available from third parties.
The following discussion may contain forward-looking statements that
involve risks and uncertainties. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might cause
future results to differ significantly from those projected in the
forward-looking statements include, but are not limited to, those discussed
below and elsewhere in this annual report, particularly those described above
under Item 3, "Key Information - Risk Factors."
Critical Accounting Policies
Our consolidated financial statements included elsewhere in this annual
report have been prepared in accordance with Israeli GAAP, which differ in
significant respects from U.S. GAAP. See Note 29 to our consolidated financial
statements, included elsewhere in this annual report, for a description of the
principal differences between Israeli GAAP and U.S. GAAP as they relate to us.
Pursuant to our application of Israeli GAAP, we have identified below
accounting policies critical to understanding the overall financial reporting of
Koor. A more complete discussion of the significant accounting policies which we
follow in preparing our financial
41
statements is set forth in Note 2 to our consolidated financial statements
included elsewhere in this annual report.
In addition, the preparation of our consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On a regular basis, we
evaluate and may revise our estimates. We base our estimates on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities, that are not readily
apparent. Some of those judgments can be complex, and consequently, actual
results may differ from those estimates. For any given individual estimate,
judgment or assumption made by us, there may be alternative estimates, judgments
or assumptions, which are also reasonable. The following discussion of our
critical accounting policies includes references to several critical accounting
policies that are impacted significantly by judgments, assumptions and estimates
used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue recognition policy is significant because our revenue is a
key component of our results of operations. We follow very specific and detailed
guidelines, several of which are discussed below, in measuring revenue. However,
such guidelines may require the exercise of certain judgments, estimates and
assumptions.
Revenues from product sales and services rendered are recognized upon
delivery of the products and/or when the economic risk of loss passes to the
customer, or upon performance of the services. In special contracts, revenues
from product sales are recognized after performing the work and passing
acceptance tests, as provided in the applicable product delivery contract.
Revenues and costs from work in progress under long-term contracts are
recognized by the "percentage of completion" method, if the following conditions
are met:
o the revenues are known or can be reliably estimated;
o the collection of revenues is expected;
o the costs involved in carrying out the project are known or can
be reliably estimated;
o there is no material uncertainty as to the ability to complete
the project and to meet the terms of the contract with the
customer; and
o the percentage of completion may be reliably estimated.
If any of these conditions are not met, revenues are recognized at an
amount equal to the costs incurred and the recovery of which is expected.
The percentage of completion is determined based on the cost (actual
cost vs. projected total cost) or based on the delivery of products, depending
on the nature of the agreement.
42
Revenues and costs from government contracts, which are based on cost
plus a fixed margin, are recognized on an accrual basis.
In the event that we anticipate a loss on a particular contract, such
anticipated loss is provided for in full.
Projected earnings or losses from long-term contracts could change as a
result of changes in estimates, between the actual performance and the original
estimate. Such changes in estimates are charged to the statement of operations
as they arise.
Inventories
Inventories are stated at the lower of cost or market value. Cost for
raw materials, auxiliary materials and spare parts is determined at average cost
or by the "first-in, first-out" method. Cost for finished goods and goods in
process is determined primarily on the basis of direct manufacturing costs and,
in part, on the basis of average manufacturing costs with the addition of
indirect manufacturing costs. Cost for merchandise is determined by the
"first-in, first-out" method or by the "moving average method." In determining
inventory value, we make assumptions as to the market value of inventory. If
there is a sudden and significant decrease in demand for our products or there
is a higher risk of inventory obsolescence because of a rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin could be adversely affected.
Investments in Affiliates
Our investments in our affiliates are presented using the equity
method. Since January 1, 2004 we have applied Israel Accounting Standards Board,
or IASB, Accounting Standard No. 20, "Goodwill amortization," according to which
goodwill arising from the acquisition of equity in an affiliate is generally
amortized at equal annual rates over a period of 10 to 20 years commencing from
acquisition date. See also "Intangible Assets and Deferred Expenses" and
"Recently Issued Accounting Pronouncements in Israel" regarding discontinuation
of the amortization of goodwill from 2006, below.
From time to time we review our investments in our affiliates to
identify whether there has been a decrease in the value of such investments
which is not of a temporary nature. We would conduct such reviews when there are
signs that the value of permanent investments has been harmed, including a drop
in stock market prices, the affiliate's sequential losses, the segment in which
the affiliate operates, the value of the goodwill aggregated in the investment
and other parameters. Following management's assessment of all the relevant
factors that are not of a temporary nature, we make provisions, if appropriate,
for the adjustment of the value of these investments, which would be reflected
in our consolidated statement of operations.
Since January 1, 2003, we have applied IASB Accounting Standard No. 15,
"Impairment In value of Assets," or Standard No. 15, to ensure that our assets
in the consolidated balance sheet are not stated at an amount exceeding their
recoverable value, which is the higher of the net sales price and the usage
value, which is the present value of the estimated future cash flows expected to
derive from the use and realization of the asset. Standard No. 15, which is
based on
43
International Accounting Standard No. 36, applies to all of our assets
in the consolidated balance sheet, except for tax assets and monetary assets.
Likewise, Standard No.15 prescribes the presentation and disclosure principles
for assets that have declined in value. When the carrying value of an asset in
the consolidated balance sheet exceeds its recoverable amount, we recognize an
impairment loss equal to the difference between the book value of the asset and
its recoverable value. A loss in recognized in this manner will be reversed only
if changes have occurred in the estimates used in determining the recoverable
value of the asset, from the date on which the last impairment loss was
recognized.
Intangible Assets and Deferred Expenses
Intangible assets are amortized over the estimated period of the
economic benefit provided by the particular asset. We assess the recoverability
of these intangible assets periodically by determining whether unamortized
capitalized costs do not exceed the net realizable value of the particular
asset. Licensing of products and acquisition of know-how are stated at cost and
are mostly amortized over 8 years. Marketing rights are stated at cost and
amortized over periods of 5 to 10 years. Intangible assets in the purchase of
products are stated at cost and are mainly amortized over 20 years. Since
January 1, 2004 we have applied IASB Accounting Standard No. 20, "Goodwill
amortization," according to which goodwill deriving from acquisitions or
investments is amortized over the period of economic benefit at equal annual
rates over a period of 10 to 20 years commencing from the acquisition date. See
also "Recently Issued Accounting Pronouncements in Israel" regarding
discontinuation of the amortization of goodwill from 2006, below.
Non-compete and confidentiality agreements are mostly amortized over 5
years.
Deferred expenses relating to debenture issuance costs are amortized
using the straight-line method over the life of the debentures, which is usually
six years.
Recently Issued Accounting Pronouncements in Israel
In July 2005, the IASB published Accounting Standard No. 22,
"Financial Instruments: Disclosure and Presentation," or Standard No. 22.
Standard No. 22 provides rules for financial statement presentation of
financial instruments and specifies the proper disclosure required in respect
thereto. Furthermore, Standard No. 22 provides the method for classifying
financial instruments as financial liabilities and as shareholders' equity, for
classifying the interest, dividends, losses and gains related to them and the
circumstances for offsetting financial assets and financial liabilities.
Standard No. 22 applies to financial statements for periods beginning on or
after January 1, 2006. Standard No. 22 will be adopted by us on a prospective
basis. Furthermore, a provision for loss that is included in the financial
statements as at December 31, 2005, in respect of an anticipated loss from a
decline in our holdings that is due to the potential exercise of options or the
conversion of convertible liabilities in subsidiaries and affiliates, will be
reversed on the date Standard No. 22 comes into effect under the item of a
cumulative effect of change in accounting policy. The comparative data
presented in the financial statements for periods beginning on the effective
date of Standard No. 22 will not be restated. The transition to Standard No. 22
resulted in an increase in shareholders' equity as at January 1, 2006 in the
44
amount of NIS 63 million due to the reversal of provisions for losses in
respect of convertible securities in subsidiaries and affiliates.
In September 2005, the IASB published Accounting Standard No. 24,
"Share- Based Payments," or Standard No. 24. Standard No. 24 requires that
share-based payment transactions, including transactions with employees or
other parties that are to be settled by equity instruments, cash or other
assets, be recognized in the financial statements. In accordance with Standard
No. 24, share-based payment transactions in which goods or services are
received will be recognized at their fair value. Furthermore, Standard No. 24
provides various disclosure requirements regarding the nature and extent of the
share-based payment arrangements that existed during the period, and regarding
the method by which the fair value of such arrangements was determined.
Standard No. 24 will apply to financial statements for periods beginning as
from January 1, 2006. Standard No. 24's provisions will be applied to each
share-based payment transaction executed after March 15, 2005 that has not
vested by the effective date of Standard No. 24. Furthermore, it is required
that comparative data relating to periods after March 15, 2005 be restated.
With respect to share-based payments classified as liabilities (such as phantom
plans) that exist on the effective date of Standard No. 24, Standard No. 24 is
to be implemented retroactively and the comparative data is to be restated.
Changes in the terms of a share-based payment transaction being settled by
means of equity instruments and executed after March 15, 2005 are to be treated
in accordance with the provisions of Standard No. 24.
The implementation of Standard No. 24 has not had a material effect on
our results of operations and financial position.
In January 2006, the IASB published Accounting Standard No. 21,
"Earnings per Share," or Standard No. 21. Standard No. 21 provides that an
entity calculate basic earnings per share with respect to the earnings or loss
attributable to the ordinary shareholders of the reporting entity and that the
entity calculate basic earnings per share with respect to the earnings or loss
from continuing operations attributable to the ordinary shareholders of the
reporting entity if such earnings or loss is presented. The basic earnings per
share will be calculated by dividing the earnings or loss attributable to the
ordinary shareholders of the reporting entity (the numerator) by the weighted
average number of ordinary shares outstanding during the period (the
denominator). In order to calculate the diluted earnings per share, an entity
will adjust the earnings or loss attributable to the ordinary shareholders of
the reporting entity, and the weighted average number of outstanding ordinary
shares, for the effects of all the dilutive potential ordinary shares. Standard
No. 21 will apply to financial statements for periods beginning on or after
January 1, 2006. The provisions of Standard No. 21 are to be implemented
retroactively for comparative earnings per share data for prior periods.
In January 2006, the IASB published Accounting Standard No. 25,
"Revenues," or Standard No. 25. Standard No. 25 provides the required accounting
treatment (recognition, measurement, presentation and disclosure principles) for
revenues deriving from the selling of goods, the rendering of services, and the
use of the entity's assets by others, which generates interest, royalties and
dividends. Standard No. 25 prescribes that the entity will measure its revenues
based on the fair value of the proceeds received and/or the proceeds that the
entity is entitled to receive. Standard No. 25 will apply to financial
statements for periods beginning on or after January 1, 2006. An entity that in
the past did not present its revenues according to the
45
requirements of the Standard regarding the reporting of gross or net revenues,
will implement the requirements of the Standard retroactively with respect to
its revenues for all the periods reported from the effective date of Standard
No. 25. Assets and liabilities that are included in the financial statements as
at December 31, 2005 will be adjusted as at January 1, 2006 to the amounts that
would have been recognized according to the provisions of Standard No. 25. The
effect of adjusting the asset and liability amounts as at January 1, 2006, will
be recognized as a cumulative effect of change in accounting method. We believe
that the initial implementation of Standard No. 25 will not have an impact on
our financial statements.
In January 2006, the IASB published an amendment to Accounting Standard
No. 20, "The Accounting Treatment of Goodwill and Intangible Assets when
Purchasing an Investee," or Standard No. 20. In accordance with Standard No. 20,
goodwill and intangible assets with an unlimited useful life, which were
identified at the time of purchasing an investee, including a subsidiary or an
affiliated company, will not be amortized. Instead, an examination of impairment
in value is performed once a year, or more frequently if events or changes in
circumstances indicate that there may have been impairment in the value of
goodwill or of an intangible asset with an unlimited useful life. Standard No.
20 will apply to financial statements for periods beginning on or after January
1, 2006. The transition date for discontinuing the amortization of goodwill is
January 1, 2006 according to Standard No. 20. On the day after the transition
date, the entity will examine the impairment in value of goodwill in accordance
with IASB Accounting Standard No. 15. The financial statements for periods in
which Standard No. 20 was not implemented will not be restated.
Impact of Devaluation on Results of Operations and on Monetary Assets and
Liabilities
The following table sets forth, for the periods indicated, certain
information with respect to the rate of inflation in Israel, the rate of
devaluation of the NIS in relation to the dollar and the rate of inflation in
Israel adjusted for the NIS-dollar devaluation:
Annual
Israeli Israeli Closing Annual Inflation
Year Ended Consumer Inflation Exchange Rate Devaluation Adjusted for
December 31, Price Index (1) Price Rate(2) of the Dollar (3) Rate (4) Devaluation (5)
------------- ---------------- -------------- ------------------ ------------- ----------------
2001 170.91 1.4 NIS 4.416 9.3 (7.2)
2002 182.01 6.5 NIS 4.737 7.3 (0.7)
2003 178.58 (1.9) NIS 4.379 (7.6) 6.2
2004 180.74 1.2 NIS 4.308 (1.6) 2.8
2005 185.05 2.4 NIS 4.603 6.8 (4.2)
____________________
(1) For purposes of this table, the CPI figures use 1993 as the base equal to
100. These figures are based on reports of the Israel Central Statistics
Bureau.
(2) Annual inflation is the percentage change in the CPI in Israel between
December of the year indicated and December of the preceding year.
(3) Closing exchange rate is the rate of exchange between the NIS and the
dollar as of December 31 of the year indicated, as reported by the Bank of
Israel.
(4) Annual devaluation is the percentage increase in the value of the dollar in
relation to the NIS during the year indicated.
(5) Annual inflation adjusted for devaluation is obtained by dividing the
Israeli inflation rate (column 2 plus 1) by the annual devaluation rate
(column 4 plus 1), minus 1.
46
Since most of our operations are based in Israel, we incur significant
expenses in NIS, which expenses are usually linked, wholly or partially, to
changes in the CPI.
The relationship between our monetary assets and liabilities, and the
extent to which these are linked to a particular currency or price index,
affects our financial results. In the event of a devaluation of the NIS in
relation to the dollar, we would report a financial expense to the extent that
our dollar-denominated or dollar-linked monetary liabilities exceed our
dollar-denominated or dollar-linked monetary assets or, conversely, we would
report financial income if our dollar-denominated or dollar-linked monetary
assets exceeded our dollar-denominated or dollar-linked monetary liabilities. On
December 31, 2005, the excess of our foreign currency denominated or linked
monetary liabilities over our foreign currency denominated or linked monetary
assets was NIS 35 million (the majority of which was dollar-denominated or
dollar-linked).
In addition, we and certain of our subsidiaries and affiliates have
entered into financial agreements with major Israeli banks and other financial
institutions in order to reduce the overall exposure of assets and liabilities
denominated in foreign currencies, and commitments for the purchase of raw
materials and the sale of goods in currencies other than the dollar arising from
foreign currency exchange rates. Such agreements include forward sales, purchase
contracts, sale options and swap transactions. For more details regarding the
balance of our hedging agreements as of December 31, 2005, see Note 21 to our
consolidated financial statements included elsewhere in this annual report. The
caption "Financing expenses, net" in our consolidated financial statements
includes the impact of these factors on monetary assets and liabilities, as well
as regular interest expense.
47
Results of Operations
The following tables summarize certain recent financial information relating to
each of our businesses. The tables are prepared on the same basis as that
utilized in our consolidated financial statements included elsewhere in this
annual report.
2004/2003 Translation 2005/2004
Changes into Changes
NIS NIS Dollars
--------------------------------------------- ---------- ------------------- ----------- ----------
2003 % 2004 % % 2005 % 2005 %
--------- -------- --------- ------- --------- --------- ------ ----------- ----------
(In (In (In (In
thousands) thousands) thousands) thousands)
REVENUES FROM
SALES AND
SERVICES
Telecommunications 827,001 13.05 671,531 8.39 (18.80) 452,433 45.77 98,291 (32.63)
Agro-chemicals 5,191,913 81.91 6,895,238 86.11 32.81 - - - (100.00)
Tourism 309,264 4.88 430,280 5.37 39.13 526,194 53.24 114,315 22.29
Others 10,448 0.16 10,564 0.13 1.11 9,755 0.99 2,119 (7.66)
---------- -------- ---------- ------- --------- --------- ------- ---------- ---------
Total 6,338,626 100.00 8,007,613 100.00 26.33 988,382 100.00 214,725 (87.66)
========== ======== ========== ======= ========= ========= ======= ========== =========
EQUITY IN THE
RESULTS OF
INVESTEE
COMPANIES, NET
Telecommunications (101,795) (87.21) (15,919) (45.40) (84.36) 29,954 8.24 6,507 N/A
Defense
electronics - - (20,000) (57.05) (100.00) (23,288) (6.40) (5,059) 16.44
Agro-chemicals - - - - - 360,469 99.16 78,312 100.00
Venture capital
investments (329) (0.28) (329) (0.94) - (755) (0.21) (164) 129.48
Tourism (12,407) (10.63) (1,148) (3.27) (90.75) (1,769) (0.49) (384) 54.09
Others (2,198) (1.88) 2,336 6.66 N/A (1,076) (0.30) (234) N/A
---------- -------- ---------- ------- --------- --------- ------- ---------- ---------
Total (116,729) (100.00) (35,060) (100.00) (69.96) 363,535 100.00 78,978 N/A
EARNINGS BEFORE
INCOME TAX
Telecommunications (56,638) (9.16) (110,617) (9.85) 95.31 (30,613) (5.41) (6,651) (72.33)
Defense
electronics - - (20,000) (1.78) - 56,180 9.93 12,205 N/A
Agro-chemicals 789,213 127.61 1,263,541 112.53 60.10 559,093 98.81 121,464 (55.75)
Venture capital
investments (71,499) (11.56) (43,327) (3.86) (39.40) (41,472) (7.33) (9,010) (4.28)
Tourism (45,024) (7.28) 36,651 3.26 N/A 27,646 4.89 6,006 (24.57)
Others 2,433 0.39 (3,414) (0.30) N/A (5,006) (0.89) (1,088) 46.63
---------- -------- ---------- ------- --------- --------- ------- ---------- ---------
Total 618,485 100.00 1,122,834 100.00 81.54 565,828 100.00 122,926 (49.61)
Joint general
expenses (39,585) (26,697) (32.55) (45,473) (9,879) 70.33
Financing
Expenses, net (236,488) (272,084) 15.05 (182,957) (39,747) (32.76)
---------- ---------- --------- --------- ---------- ---------
Earnings before
income tax 342,412 824,053 140.66 337,398 73,300 (59.06)
========== ========== ========= ========= ========== =========
CAPITAL
EXPENDITURES
Telecommunications 7,449 2.56 21,825 2.56 192.99 7,529 28.00 1,636 (65.50)
Agro-chemicals 277,195 95.44 816,287 95.92 194.48 - - - (100.00)
Tourism 4,722 1.63 12,735 1.50 169.70 19,125 71.11 4,155 50.18
Other 1,061 0.37 148 0.02 (86.05) 239 0.89 52 61.49
---------- -------- ---------- ------- --------- --------- ------- ---------- ---------
Total 290,427 100.00 850,995 100.00 193.02 26,893 100.00 5,843 (96.84)
CORPORATE ASSETS 392 423 7.91 177 38 (58.16)
---------- ---------- --------- --------- ---------- ---------
290,819 851,418 192.77 27,070 5,881 (96.82)
========== ========== ========= ========= ========== =========
48
REVENUES FROM
SALES AND
SERVICES BY
DESTINATION (1)
North America 1,032,421 16.29 1,443,596 18.03 39.83 517,875 52.40 112,508 (64.13)
Europe 2,357,259 37.19 3,062,793 38.25 29.93 109,872 11.12 23,870 (96.41)
South America 1,565,019 24.69 1,946,416 24.31 24.37 11,950 1.21 2,596 (99.39)
Asia and
Australia 614,054 9.69 566,494 7.07 (7.75) 17,527 1.77 3,808 (96.91)
Africa 285,559 4.51 216,853 2.71 (24.06) 15,269 1.54 3,317 (92.96)
Israel 484,314 7.64 771,461 9.63 59.29 315,889 31.96 68,627 (59.05)
---------- -------- ---------- ------- --------- --------- ------- ---------- ---------
Total 6,338,626 100.00 8,007,613 100.00 26.33 988,382 100.00 214,726 (87.66)
========== ======== ========== ======= ========= ========= ======= ========== =========
(1) Destination to which shipment is made.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
During 2005, we sold part of our investments in MA Industries and
Telrad. As a result, we ceased to control these companies, which has resulted in
their deconsolidation during 2005. These companies are now included in our
consolidated financial statements according to the equity method. As a result of
the deconsolidation of these companies and to reflect the nature of our
activities as a holding company, we have classified our statement of operations
in a single-stage format. Total revenues and income, including our equity in the
results of affiliates, are presented within revenues. The comparative figures
have been reclassified on a consistent basis. As a result, our results of
operations for the year ended December 31, 2005 are not comparable, on a line by
line basis, to previous years; however, net earnings is comparable to the prior
periods.
The following is an analysis of our consolidated results of operations,
followed by an analysis of the results of operations of each of our businesses.
Revenues from sales and services. Revenues from sales and services
decreased 87.7% to NIS 988 million in 2005 compared to NIS 8,008 million in
2004. Revenues for 2004 included NIS 6,895 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 195 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Our other subsidiaries showed increased revenues, mainly an increase of
NIS 63 million in Dekolink's revenues and an increase of NIS 96 million in the
revenues of our tourism businesses, Sheraton Moriah and Isram Wholesale Tours
and Travel, Ltd, or Isram.
Export and international operations, representing 68% of our revenues
from sales and services in 2005, decreased 91% in 2005 compared to 2004, of
which NIS 6,583 million was related to the impact of the deconsolidation of MA
Industries and Telrad in 2005.
Group's equity in the operating results of affiliates, net. Our equity
in the operating results of affiliates, net in 2005 was a profit of NIS 364
million compared to a loss of NIS 35 million in 2004. Our equity in the
operating results of affiliates, net for 2005 included profit of NIS 360 million
in respect of MA Industries, which was consolidated in 2004, and loss of NIS 26
million for the second half of 2005 in respect of Telrad, which was consolidated
during the same period in 2004. Also included in this item in 2005 are our
equity share in the net profit of
49
ECI in the amount of NIS 56 million and our equity share in the net loss of
Tadiran Communications in the amount of NIS 23 million. In 2004, our equity
share in the net loss of ECI was NIS 15 million and our equity share in the net
loss of Tadiran Communications was NIS 20 million, which was primarily due to
the writeoff of part of the purchase price of Tadiran Communications allocated
to in-process research and development.
Other income (expenses), net. Other income, net, amounted to NIS 223
million in 2005 compared to other expenses, net of NIS 72 million in 2004. Other
income, net, in 2005 included:
o Capital gains of NIS 308 million from sale of investments, mainly
the sale of approximately 10% of our equity interest in MA
Industries and the sale of our equity interest in Tadiran
Communication (33%). In 2004, we recorded capital gains of NIS
223 million from the sale of investments, mainly from the sale of
7% of our equity interest in MA Industries, and the sale of 19%
of our equity interest in Knafaim;
o Impairment in the value of investments and assets of Koor CVC in
the amount of NIS 69 million. In 2004, we recorded an impairment
in the value of investments and assets of NIS 73 million,
including a NIS 58 million impairment of Koor CVC's investments;
o Provision for severance compensation of NIS 39 million at Telrad,
compared to NIS 45 million in 2004;
o Management services to affiliated companies of NIS 14 million,
primarily to MA Industries; and
o Goodwill amortization and write-off of NIS 0.5 million, compared
to NIS 132 million in 2004, of which NIS 131 million was at MA
Industries.
Cost of sales and services. Cost of sales and services decreased 84.8%
to NIS 802 million in 2005 compared to NIS 5,278 million in 2004. Cost of sales
and services for 2004 included NIS 4,331 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 204 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Our other subsidiaries' cost of sales and services increased 23%, mainly
due to an increase of NIS 38 million in Dekolink's cost of sales and services
and an increase of NIS 67 million in the cost of sales and services of our
tourism businesses, Sheraton Moriah and Isram.
Selling and marketing expenses. Selling and marketing expenses
decreased 91.7% to NIS 89 million in 2005 compared to NIS 1,066 million in 2004.
Selling and marketing expenses for 2004 included NIS 965 million in respect of
MA Industries, which was not consolidated in 2005, and NIS 19 million for the
second half of 2004 in respect of Telrad, which was not consolidated during the
second half of 2005. Other subsidiaries' selling and marketing expenses
increased 37%, mainly due to an increase of NIS 13 million in Dekolink's selling
and marketing expenses.
General and administrative expenses. General and administrative
expenses decreased 64.4% to NIS 164 million in 2005 compared to NIS 460 million
in 2004. General and
50
administrative expenses for 2004 included NIS 299 million in respect of MA
Industries, which was not consolidated in 2005, and NIS 21 million for the
second half of 2004 in respect of Telrad, which was not consolidated during the
second half of 2005. Excluding the impact of the deconsolidation of MA
Industries and Telrad in 2005, general and administrative expenses increased
34%, mainly due to an increase of NIS 12 million in compensation expenses and
professional fees at the corporate level, and an increase NIS 6 million in the
general and administrative expenses of our tourism businesses, Sheraton Moriah
and Isram.
Financing expenses, net. Financing expenses, net were NIS 183 million
in 2005 compared to NIS 272 million in 2004, a decrease of 32.7%. Financing
expenses, net for 2004 included NIS 134 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 0.6 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Financing expenses, net in respect of companies that were consolidated
both in 2004 and 2005, increased 30% in 2005, mainly due to an increase of NIS
16 million at Sheraton Moriah and an increase of NIS 34 million at the parent
company level. Despite the decrease in our net debt at the parent company level,
financing expenses increased in 2005 compared to 2004 due to the impact of the
increase in the CPI on our CPI-linked long-term loans (2.4% in 2005 compared to
1.2% in 2004), and due to the impact of the changes in the US dollar exchange
rate on our dollar-linked loans (an increase of 6.8% in 2005 compared to a
decrease of 1.6% in 2004).
Income tax. Income tax recorded in 2005 amounted to NIS 81 million
compared to NIS 272 million in 2004. Income tax for 2004 included NIS 234
million in respect of MA Industries, which was not consolidated in 2005, and NIS
49 million for the second half of 2004 in respect of Telrad, which was not
consolidated during the second half of 2005. Excluding the impact of the
deconsolidation of MA Industries and Telrad, income tax in 2004 amounted to
income of NIS 11 million. Tax expenses at the parent company level increased by
NIS 96 million, mainly due to the realization of a deferred tax asset, created
in 2004, in connection with the sale of shares of MA Industries in 2005. Taxes
on income as a percentage of revenues in 2005 and 2004 were 8.2% and 3.4%,
respectively.
Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to income of NIS 9
million in 2005 compared to expenses of NIS 431 million in 2004. Minority
interest in consolidated companies' results, net for 2004 included NIS 447
million in respect of MA Industries, which was not consolidated in 2005.
Minority interest in consolidated companies' results, excluding MA Industries,
in 2004 amounted to income of NIS 19 million. The decrease in 2005 compared to
2004 was mainly due to the decrease in the minority interest in the losses of
Sheraton Moriah, due to the improvement in Sheraton Moriah's results of
operations.
Net earnings (loss). For the reasons mentioned above, we reported net
earnings of NIS 313 million in 2005, compared to NIS 145 million in 2004.
51
Telecommunications Equipment Business
Year Ended December 31,
-------------------------------------------------------
2004 2005 2005
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services........ 671,531 452,433 98,291
Losses before financing expenses........ (110,617) (30,613) (6,651)
Revenues from sales and services from our telecommunication equipment
business decreased 32.6% in 2005 to NIS 452 million from NIS 672 million in
2004. The decrease was primarily due to the deconsolidation of Telrad during the
second half of 2005, partially offset by an increase of NIS 63 million in sales
of Dekolink, due to the introduction of new products and expansion of Dekolink's
customer base.
Telecommunication equipment business exports amounted to NIS 427
million in 2005 compared to NIS 570 million in 2004.
Losses before financing expenses from our telecommunication equipment
business were NIS 31 million in 2005 compared to NIS 111 million in 2004. The
decrease was primarily due to the increase of NIS 71 million in our equity share
in ECI's earnings.
Defense Electronics Business
Year Ended December 31,
-------------------------------------------------------
2004 2005 2005
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services......... - - -
Earnings (losses) before financing
expenses................................ (20,000) 56,180 12,205
Earnings before financing expenses from our defense electronics
business amounted to NIS 56 million compared to loss before financing expenses
of NIS 20 million in 2004. The loss in 2004 resulted primarily from the writeoff
of NIS 20 million of the purchase price of Tadiran Communications allocated to
in-process research and development. Earnings before financing expenses from our
defense electronics business include capital gains of NIS 72 million from the
sale of Tadiran Communications in November 2005. See Note 3D to the consolidated
financial statements included elsewhere in this annual report.
Our defense electronics business Elisra was reclassified as a
discontinued operation as a result of the sale in November 2005, as described
above. See Note 24(1) to the consolidated financial statements included
elsewhere in this annual report. Elisra's revenues from sales and services
decreased 12.6% to NIS 969 million in 2005 compared to NIS 1,109 million in 2004
as a result of the continued reduction in new orders and further reduction in
the Israeli defense
52
budget. The earnings before financing expenses of the discontinued defense
electronics operation amounted to NIS 75 million in 2005, compared to NIS 16
million in 2004. Earnings before financing expenses of the discontinued defense
electronics operation included capital gains of NIS 148 million from the sale
of Elisra in November 2005. See Note 3D to the consolidated financial
statements included elsewhere in this annual report.
Agrochemicals Business
Year Ended December 31,
-------------------------------------------------------
2004 2005 2005
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services......... 6,895,238 - -
Earnings before financing expenses....... 1,263,541 559,093 121,462
Net earnings 271,820 357,415 77,648
As of January 1, 2005, MA Industries ceased to be consolidated in our
financial statements, and is accounted for according to the equity method. See
Note 3B(2) to the consolidated financial statements included elsewhere in this
annual report.
Earnings before financing expenses from our agrochemicals business were
NIS 559 million compared to NIS 1,264 million in 2004. The decrease was
primarily due to the deconsolidation of MA Industries as of January 1, 2005.
Earnings before financing expenses from our agrochemicals business for 2005 and
2004 include NIS 199 million in capital gains from the sale of shares in MA
Industries in February 2005 and NIS 159 million in capital gains from the sale
of shares in MA Industries in January 2004, respectively.
Net earnings from our agrochemicals business, excluding the
abovementioned capital gains, were NIS 357 million in 2005 compared to NIS 272
million in 2004. The increase in MA Industries' revenues was due to the increase
in the global agrochemicals market generally, and particularly in North America
and Europe, due to increased sales related to subsidiaries acquired in 2004 and
2005, as well as the introduction of new products. Furthermore, MA Industries
gross and operating margins increased in 2005 compared to 2004, due to the
abovementioned increase in sales, the impact of the newly-acquired subsidiaries
and the strengthening of the primary trading currencies.
Venture Capital Business
Year Ended December 31,
-------------------------------------------------------
2004 2005 2005
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services..... -- -- --
Losses before financing expenses..... (43,327) (41,472) (9,010)
This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2005, the book value of Koor CVC's investments totaled
approximately NIS 166 million ($36 million). These
53
investments include publicly traded Scopus Video Networks, or Scopus, in which
Koor CVC holds an 18% interest on a fully-diluted basis. During 2005, Koor CVC
recorded NIS 69 million of provisions for the decline in value of several of
its portfolio companies. Furthermore, in 2005 Koor CVC recorded $7 million (NIS
31 million) capital gain following the initial public offering of portfolio
company Scopus. The net result of the above was recorded in our consolidated
financial statements under the caption "Other income (expenses), net".
In 2004, Koor CVC recorded NIS 58 million of provisions for the decline
in value of several of its portfolio companies, net of a $4 million (NIS 17
million) capital gain following the sale of its entire holdings in its portfolio
companies Riverhead Networks and Envara under the caption "Other income
(expenses), net".
Tourism
Year Ended December 31,
-------------------------------------------------------
2004 2005 2005
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services.......... 430,280 526,194 114,315
Earnings before financing expenses........ 36,651 27,646 6,006
Revenues from sales and services from our tourism business increased
22.3% to NIS 526 million in 2005 from NIS 430 million in 2004. This increase was
primarily attributable to the increase in sales of Sheraton Moriah as a result
of the increase in tourism to Israel, as well as the increase in the sales of
Isram, which benefited from the increase in worldwide tourism in general and the
increase in incoming tourism to Israel, in particular.
Earnings before financing expenses from tourism business were NIS 27
million in 2005, compared to NIS 37 million in 2004. Earnings before financing
expenses for 2004 include a capital gain of NIS 51 million from the sale of 19%
of Knafaim.
Other Businesses
Year Ended December 31,
-------------------------------------------------------
2004 2005 2005
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services......... 10,564 9,755 2,119
Losses before financing expenses......... (3,414) (5,006) (1,088)
Our other business, Koor Trade, was reclassified as a discontinued
operation, as described above. See Note 24(2) to the consolidated financial
statements included elsewhere in this annual report. Koor Trade's revenues from
sales and services increased 40.9% to NIS 157 million in 2005 compared to NIS
112 million in 2004. Losses before financing expenses of Koor Trade amounted to
NIS 45 million in 2005 compared to earnings before financing expenses of NIS 24
million in 2005. The loss in 2005 was primarily due to the impairment in value
recorded
54
in respect of Koor Trade. See Note 3G and Note 24(2) to the consolidated
financial statements included elsewhere in this annual report.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The following is an analysis of our consolidated results of operations,
followed by an analysis of the results of operations of each of our businesses.
Revenues from sales and services. Revenues from sales and services
increased 26.3% to NIS 8,008 million in 2004 compared to NIS 6,339 million in
2003. The increase was mainly due to an increase of NIS 1,703 million in MA
Industries' revenues and a slight increase in the revenues of Sheraton Moriah
and Isram (NIS 121 million), partially offset by decrease in the revenues of
Telrad (NIS 186 million).
Export and international operations, representing 90% of our revenues
from sales and services in 2004, increased 23.6% in 2004 compared to 2003,
primarily as a result of a NIS 1,620 million increase in MA Industries' exports,
partially offset by decreases in the exports of Telrad (NIS 171 million).
Group's equity in the operating results of affiliates, net. Our equity
in the operating results of affiliates, net in 2004 was a loss of NIS 35 million
compared to a loss of NIS 117 million in 2003. This item mainly included the
write-off of NIS 20 million of the purchase price of Tadiran Communications
allocated to in-process research and development, and our equity share in the
net loss of ECI in the amount of NIS 15 million, compared with NIS 101 million
in 2003. In 2004, our equity share in the earnings of Knafaim was negligible,
compared to a loss of NIS 11 million in 2003.
Cost of sales and services. Cost of sales and services increased 24.8%
to NIS 5,278 million in 2004 compared to NIS 4,229 million in 2003. The increase
in cost of sales and services was mainly due to an increase in the cost of sales
and services of MA Industries (NIS 1,023 million), partially offset by a
decrease in Telrad's cost of sales and services. Cost of sales and services as a
percentage of revenue from sales and services was 65.3% in 2004 compared to
66.7% in 2003.
Selling and marketing expenses. Selling and marketing expenses
increased 27.7% to NIS 1,066 million in 2004 compared to NIS 835 million in
2003. The increase in selling and marketing expenses was mainly due to an
increase in the selling and marketing expenses of MA Industries (NIS 255
million), partially offset by a decrease in Telrad's selling and marketing
expenses . Selling and marketing expenses as a percentage of revenue from sales
and services was 13.3% in 2004 compared to 13.2% in 2003.
General and administrative expenses. General and administrative
expenses increased 19.8% to NIS 460 million in 2004 compared to NIS 384 million
in 2003. The increase in general and administrative expenses was mainly due to
an increase in the general and administrative expenses of MA Industries (NIS 62
million). General and administrative expenses as a percentage of revenue from
sales and services was 5.7% in 2004 compared to 6.1% in 2003.
55
Other income (expenses), net. Other expenses, net, amounted to NIS 72
million in 2004 compared to NIS 194 million in 2003. Other expenses, net, in
2004 included:
o Capital gains of NIS 223 million from sale of investments, mainly
the sale of 7% of our equity interest in MA Industries and the
sale of 19% of our equity interest in Knafaim. In 2003, we
recorded capital gains of NIS 22 million from the sale of
investments, mainly from the sale by Telrad of certain
investments, and our sale of 2.6% of our equity interest in MA
Industries;
o Impairment in the value of investments and assets of NIS 73
million, including a NIS 58 million impairment of Koor CVC's
investments. In 2003, we recorded an impairment in the value of
investments and assets of NIS 107 million, including a NIS 72
million impairment of Koor CVC's investments;
o Provision for severance compensation of NIS 45 million, primarily
at MA Industries (NIS 22 million) and Telrad (NIS 24 million),
compared to income of NIS 8 million in 2003; and
o Goodwill amortization and write-off of NIS 132 million, primarily
at MA Industries (NIS 131 million), compared to NIS 114 million
in 2003.
Financing expenses, net. Financing expenses, net were NIS 272 million
in 2004 compared to NIS 236 million in 2003. Despite the decrease in our
consolidated net debt, financing expenses increased in 2004 compared to 2003 due
to the impact of the increase in the CPI on our CPI-linked long-term loans
following the discontinuation of the adjustment of our financial statements for
inflation as of January 1, 2004.
Income tax. Income tax recorded in 2004 amounted to NIS 272 million
compared to NIS 94 million in 2003. The increase was mainly due to increases of
NIS 84 million in the tax expenses of MA Industries, as well as an increase of
NIS 42 million in the tax expense of Telrad, mainly as the result of the
impairment of a deferred tax asset. In addition, tax income at the parent
company level decreased by NIS 37 million, mainly due to the realization of a
deferred tax asset, created in 2003, in connection with the sale of shares of MA
Industries in 2004. Taxes on income as a percentage of revenues in 2004 and 2003
were 3.4% and 1.5%, respectively.
Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to earnings of NIS 431
million in 2004 compared to earnings of NIS 207 million in 2003. The increase
was mainly due to MA Industries (NIS 191 million) and Telrad (NIS 26 million).
56
Net earnings (loss). For the reasons mentioned above, we reported net
earnings of NIS 145 million in 2004, compared to NIS 46 million in 2003.
Telecommunications Equipment Business
Year Ended December 31,
-------------------------------------------------------
2003 2004 2004
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services......... 827,001 671,531 145,890
Losses before financing expenses......... (56,638) (110,617) (24,032)
Revenues from sales and services from our telecommunication business
decreased 18.8% in 2004 to NIS 672 million from NIS 827 million in 2003. The
decrease was primarily due to a decrease of NIS 186 million in sales of Telrad,
continuing the decline in orders for new telecommunications equipment that
Telrad has experienced over the past few years. Telrad's decrease in sales was
partially offset by an increase of NIS 18 million in sales of Microwave Networks
Inc., a U.S. subsidiary.
Telecommunication business exports amounted to NIS 570 million in 2004
compared to NIS 722 million in 2003. The decrease in export sales resulted from
Telrad.
Losses before financing expenses from our telecommunication equipment
business were NIS 111 million in 2004 compared to NIS 57 million in 2003. The
increase in losses before financing expenses in 2004 resulted from the decrease
in Telrad's sales.
Defense Electronics Business
Year Ended December 31,
-------------------------------------------------------
2003 2004 2004
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services........ - - -
Losses before financing expenses........ - (20,000) (4,345)
Losses before financing expenses from our defense electronics business
in 2004 resulted from the writeoff of NIS 20 million of the purchase price of
Tadiran Communications allocated to in-process research and development.
Our defense electronics business Elisra was reclassified as a
discontinued operation as a result of the sale in November 2005, as described
above. See Note 24(1) to the consolidated financial statements included
elsewhere in this annual report. Elisra's revenues from sales and services
decreased 11.6% to NIS 1,109 million in 2004 compared to NIS 1,255 million in
2003, primarily as a result of a major reduction in the Israeli defense budget,
as well as a lag in new orders and delays by subcontractors. The earnings before
financing expenses of the discontinued defense electronics operation were NIS 16
million in 2004, compared to losses before financing expenses of NIS 29 million
in 2003, primarily as a result of the reduction of costs due to implementation
of efficiency measures in 2003.
57
Agrochemicals Business
Year Ended December 31,
-------------------------------------------------------
2003 2004 2004
--------------- ------------------ ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services........ 5,191,913 6,895,238 1,497,988
Earnings before financing expenses...... 789,213 1,263,541 274,504
Revenues from sales and services from our agrochemicals business
increased 32.8% to NIS 6,895 million in 2004 from NIS 5,192 million in 2003, as
a result of increased sales of the MA group (see below). Approximately 93.3% and
92.7% of the sales in 2004 and 2003, respectively, were made outside of Israel.
The increase in the MA group's sales was primarily attributable to the
consolidation of newly acquired subsidiaries, sales of new products, increased
sales of existing products (mainly in Brazil), as well as the strengthening of
the Euro against the dollar.
Earnings before financing expenses from our agrochemicals business
increased 60.1% to NIS 1,263 million in 2004 from NIS 789 million in 2003 as a
result of increased sales and, to a lesser extent, as a result of the
strengthening of primary trading currencies against the dollar, partially offset
by an increase in raw material costs. Earnings before financing expenses from
our agrochemicals business include NIS 159 million in capital gains from the
sale of shares in MA Industries in January 2004.
Venture Capital Business
Year Ended December 31,
-------------------------------------------------------
2003 2004 2004
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services.......... -- -- --
Losses before financing expenses.......... (71,499) (43,327) (9,413)
As of December 31, 2004, the book value of Koor CVC's investments in
its start-up companies, a venture capital fund and Scopus Network Technologies
(now called Scopus Video Networks), in which Koor CVC held a 27% interest on a
fully-diluted basis, totaled approximately NIS 181 million. During 2004, Koor
CVC recorded NIS 58 million of provisions for the decline in value of several of
its portfolio companies. This expense was recorded in our consolidated financial
statements under the caption "Other income (expenses), net".
In 2004, Koor CVC received approximately $8.8 million in proceeds from
the sale of its holdings in its portfolio companies Riverhead Networks and
Envara. The gain to Koor CVC was NIS 17 million which was recorded in our
consolidated financial statements under the caption "Other income (expenses),
net".
58
Tourism
Year Ended December 31,
-------------------------------------------------------
2003 2004 2004
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services......... 309,264 430,280 93,478
Earnings (losses) before financing
expenses............................... (45,024) 36,651 7,962
Revenues and earnings from our tourism business increased 39.1% to NIS
430 million in 2004 from NIS 309 million in 2003. This increase was primarily
attributable to the increase in sales of Sheraton Moriah as a result of the
increase in tourism to Israel, as well as the increase in the sales of Isram.
Earnings before financing expenses from our tourism business were NIS
37 million in 2004, compared to losses before financing expenses of NIS 45
million in 2003, mainly as earnings before financing expenses for 2004 include a
capital gain of NIS 50 million from the sale of 19% of Knafaim.
Other Businesses
Year Ended December 31,
-------------------------------------------------------
2003 2004 2004
--------------- ------------------ -----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services........... 10,448 10,564 2,295
Earnings (losses) before financing
expenses................................. 2,433 (3,414) (742)
Our other business, Koor Trade, was reclassified as a discontinued
operation, as described above. See Note 24(2) to the consolidated financial
statements included elsewhere in this annual report. Koor Trade's revenues from
sales and services increased 15.8% to NIS 112 million in 2004 compared to NIS 96
million in 2003. Earnings before financing expenses of Koor Trade amounted to
NIS 24 million in 2004 compared to NIS 13 million in 2003.
Quarterly Results
The following table presents unaudited quarterly financial information
for each of the four quarters of the year ended December 31, 2005. Such
information has been prepared on the same basis as our consolidated financial
statements.
59
Quarter Ended Year Ended
------------------------------------------------------ ------------
March June September December December
31, 2005 30, 2005 30, 2005 31, 2005 31, 2005
----------- ----------- ----------- --------- ------------
(in millions of NIS)
Revenues and earnings............ 484 495 297 299 1,575
Earnings before income tax....... 173 110 27 27 337
Net earnings from continuing
operations....................... 105 98 30 33 266
Net earnings from discontinued
operations ...................... 7 (31) (6) 80 50
Net earnings..................... 109 67 24 113 313
Our operating results may be subject to significant fluctuations in
future periods. Our operating results for any particular quarter are not
necessarily indicative of any future results. Our quarterly operating results
may be subject to significant fluctuations due to various factors, including
changes in our investment portfolio and factors affecting our various segments
such as the length of the sale cycles, the timing and size of orders and
shipments to customers, variations in distribution channels, mix of products,
new product introductions, competitive pressures and general economic
conditions.
Recent Developments
During the first six months of 2006, we purchased an additional
6,920,565 shares of M-A Industries. Our holding in the voting rights of M-A
Industries at June 30, 2006 is 33.7%.
In January 2006, we signed an agreement for the acquisition of 50% of
the issued and paid share capital, of Epsilon Investment House Ltd. ("Epsilon").
Epsilon is engaged in providing a wide range of financial services including
portfolio management, mutual funds' management, underwriting, provident fund
management and consulting in mergers and acquisitions. The transaction was
completed on April 11, 2006 after receipt of approvals under all applicable
laws, including the approval of the Israeli capital market commissioner.
According to the agreement, we were allocated new shares, and also purchased
shares from certain of the existing shareholders of Epsilon, for total
consideration of NIS 106 million.
On May 1, 2006, Discount Investment Corp. Ltd., a member of the IDB
Group, announced that it had entered into an agreement for the acquisition of
approximately 35.4% of our issued share capital. Completion of the transaction
is subject to certain conditions, including the approval of the Israeli
Anti-Trust Commissioner. The closing of the transaction is to take place by July
30, 2006, but may be extended by an additional 90 days under certain
circumstances. IDB Group is an interested party of ours and holds approximately
10% of our shares prior to the abovementioned transaction.
Effective Corporate Tax Rate
We do not file a consolidated tax return with our subsidiaries, and we
are taxed only on our own income. Most of our subsidiaries file their own tax
returns, based on their own taxable income. Our income tax obligations and our
Israeli subsidiaries' income tax obligations are based on profits determined in
nominal NIS for Israeli statutory purposes, adjusted for tax
60
purposes, in terms of end-of-year Israeli currency, in accordance with changes
in the CPI. The tax provision in our financial statements does not directly
relate to income shown on such statements. See Note 16H (2) to our consolidated
financial statements included elsewhere in this annual report for the
reconciliation between the theoretical and actual tax expense. Non-Israeli
subsidiaries are taxed based upon tax laws in their respective countries of
residence. The effective corporate tax rate is affected mainly by tax benefits
arising from reduced tax rates applied to approved enterprises, utilization of
tax loss carry forwards for which no deferred taxes were recorded, the effect
of the Inflationary Adjustment Law on Israeli companies, whose functional
currency is the dollar, and the disallowance of provisions for anticipated
losses from the sale of assets. In 2005, we had a profit before taxes of NIS
337 million. See Note 16H to our consolidated financial statements included
elsewhere in this annual report.
Liquidity and Capital Resources
We finance our corporate level activities principally through the
proceeds from divestitures, management fees and dividends we receive from our
subsidiaries and affiliates and through debt financing. In 2005 and 2004, we
received management fees in the amount of NIS 20 million and NIS 22 million,
respectively. In addition, in 2005 and 2004 we received NIS 114 million and NIS
135 million, respectively, in distributions from subsidiaries and affiliates, of
which NIS 82 million and NIS 68 million, respectively, was received from
Makhteshim-Agan Industries Ltd., or MA Industries. Of the NIS 249 million in
distributions we received in 2004 and 2005, NIS 81 million was received as a
liquidating distribution in respect of our wholly-owned subsidiary, Tadiran Ltd.
Our shareholders' equity at December 31, 2005 increased 32.4% to NIS
2,483 million, compared to NIS 1,876 million at December 31, 2004. The increase
in 2005 was primarily due to the increase in our net earnings and in the
cumulative foreign currency translation adjustments.
Working capital at December 31, 2005 was NIS 543 million compared to
NIS 765 million at December 31, 2004. The impact of the deconsolidation of MA
Industries and Telrad resulted in a NIS 1,304 million decrease in working
capital in 2005, which was partially offset by an increase of NIS 787 million in
working capital at the parent company, as well as an increase of NIS 299 million
in working capital at Sheraton-Moriah.
Long-term debt totaled NIS 2,000 million at December 31, 2005, or 37.8%
of total assets on that date, compared to NIS 3,071 million at December 31,
2004, or 23.4% of total assets on that date.
Total debt at December 31, 2005 was NIS 2,272 million, or 42.9% of
total assets, compared to NIS 4,728 million, or 36.0% of total assets, at
December 31, 2004.
In accordance with several of our financing agreements, we and several
of our subsidiaries and affiliates undertook to maintain certain financial
covenants, including minimum shareholders' equity and debt capital, ratio of
shareholders' equity to debt capital, and a ban on creating pledges without the
advance consent of the banks providing the financing. We also undertook to use
the proceeds from the sale of certain assets to repay a portion of our existing
61
debt. As of December 31, 2005 and June 30, 2006, we and our relevant
subsidiaries and affiliates are in compliance with the above covenants.
Summary of our Contractual Obligations and Commercial Commitments
For purposes of presenting the approximate cash flows that will be
required to meet our material contractual obligations, the following table
presents a summary of those obligations, as of December 31, 2005:
Payments Due by Period
-------------------------------------------------------------------------
(in millions of NIS)
Less Than 2-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------------- ------------- ------------- -------- ---------- -------------
Debt to Banks(1)........................ 2,371 360 413 1,185 413
Debentures(1)........................... 458 22 22 413 -
Operating Lease Obligations............. 18 12 6 - -
Other Obligations(2).................... 59 1 22 4 32
Total Contractual Cash Obligations...... 2,906 396 463 1,603 445
(1) Includes future interest payments in accordance with applicable
interest rates and linkage bases detailed in Note 15 to our financial
statements included elsewhere in this annual report..The Israeli CPI is
assumed to increase 2% per annum, LIBOR interest rate and Prime
interest rate published by the Israeli central bank are assumed to be
5% and 6.25%, respectively and dollar exchange rate is assumed to
remain as at December 31, 2005.
(2) Includes mainly loans from shareholders in subsidiaries and receipts
from time-sharing units at Sheraton-Moriah.
For purposes of presenting the approximate cash flows that will be
required to meet our other commercial commitments, the following table presents
a summary of those commitments, as of December 31, 2005:
Amount of Commitment Expiration Per Period
---------------------------------------------------------------------------
(in millions of NIS)
Total Less Than 2-3 4-5 After
Other Commercial Commitments Commitment 1 Year Years Years 5 Years
-------------------------------------- -------------- ----------- ------- -------- -----------
Guarantees(1)......................... 274 50 29 -- 195
Commitments for investment
in Venture Capital Funds(3)........... 11 8 3 -- --
Total Commercial
Commitments........................... 285 58 32 -- 195
(1) Includes: (i) a guarantee Bezeq (Israeli telecommunications company)
received from Koor in the amount of NIS 132 million; and
(ii) guarantees by us for affiliates and other non-consolidated companies
in the amount of
62
approximately NIS 142 million. See Note 22E to our
consolidated financial statements included elsewhere in this annual report.
(2) This amount represents Koor CVC's remaining obligation for investment in
its portfolio funds, which may be drawn upon by the funds over the next 1-3
years, based on their needs.
Cash Flows
Cash and cash equivalents increased by NIS 27 million in 2005 compared
to 2004.
Cash flows used in operating activities in 2005 were NIS 175 million,
compared to cash flows generated by operating activities of NIS 894 million in
2004. The decrease in cash flows from operating activities stems mainly from
minority interest in losses of subsidiaries of NIS 9 million in 2005 compared to
minority interest in earnings of subsidiaries of NIS 431 million in 2004;
depreciation and amortization of NIS 43 million in 2005 compared to NIS 431
million in 2004; equity in operating results of affiliates of NIS (269) million
in 2005 compared to NIS 36 million in 2004, investments in formerly consolidated
subsidiaries of 205 million in 2005 compared to negligible amount in 2004, and
investments in affiliated companies of NIS 77 million in 2005, compared to NIS
227 million in 2004.
Cash flows generated by investing activities in 2005 were NIS 419
million, compared to cash used in investing activities of NIS 723 million in
2004. Cash used for the acquisition of subsidiaries (mainly by MA Industries)
and affiliates (mainly the acquisition of Tadiran Communications) was zero in
2005, compared to NIS 940 million in 2004. Proceeds from sales of subsidiaries
and affiliated companies and others (mainly the sale of shares of MA Industries
and Tadiran Communications) were NIS 645 million, compared to NIS 636 million in
2004. The investment in fixed assets, net after deduction of investment grants,
amounted to NIS 21 million, compared to NIS 204 million in 2004. Investment in
intangible assets amounted to NIS 1 million in 2005, compared to NIS 153 million
in 2004, mainly as a result of investments by MA Industries. Investments in
venture capital companies amounted to NIS 15 million, compared to NIS 35 million
last year. Furthermore, in 2005, cash used to increase short-term deposits and
investments amounted to NIS 167 million, compared to cash generated by the
decrease in short-term deposits and investments of NIS 17 million in 2004. Net
cash inflow generated by investing activities of discontinued operations (mainly
Elisra) was NIS 144 million in 2005, compared to net cash outflow of NIS 49
million in 2004. This includes proceeds from the sale of Elisra in the amount of
NIS 320 million.
Financing activities during 2005 consumed NIS 553 million, compared to
NIS 128 million during 2004. Long-term loans received in 2005 amounted to NIS
1,338 million, compared to NIS 973 million in 2004. The loans were received
mainly at the parent company level. Repayment of long-term loans in 2005
amounted to NIS 1,887 million compared to NIS 1,782 million in 2004. Loans were
repaid mainly at Koor (the parent company). There were no proceeds from the
issuance of convertible debentures in 2005, compared to proceeds of NIS 666
million in 2004 (issued by MA Industries). Short-term credit, net, decreased by
NIS 475 million in 2005, compared to an increase of NIS 10 million in 2004.
63
Impact of Inflation and Currency Fluctuations
The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is
offset on a lagging basis) by a devaluation of the NIS in relation to the
dollar. The inflation rate in Israel was 2.4 % in 2005 as compared to 1.2% in
2004. At the same time, the depreciation of the NIS against the dollar was 6.8%
in 2004 as compared to an appreciation of 1.6% in 2004. The decrease in the
dollar cost of our operations in Israel relates primarily to the cost of
salaries in Israel, which are paid in NIS, and constitutes a substantial portion
of our expenses.
Trend Information
Our financial condition and results of operation may be subject to
significant fluctuations in future periods. Our past financial condition and
results of operation are not necessarily indicative of any future results. Our
future financial condition and results of operation may be subject to
significant fluctuations due to various factors, including changes in our
investment portfolio due to the acquisition or divestiture of subsidiaries or
other companies, and factors affecting our various segments such as the length
of the sale cycles, the timing and size of orders and shipments to customers,
variations in distribution channels, mix of products, new product introductions,
competitive pressures and general economic conditions.
Off-Balance Sheet Arrangements
The only off-balance sheet arrangements we have that are reasonably
likely to have a material effect on our financial condition, operating results,
liquidity or capital resources are the guarantees and commitments described
above under "Liquidity and Capital Resources -- Summary of our Contractual
Obligations and Commercial Commitments."
64
Item 6. Directors, Senior Management and Employees.
------------------------------------------
Directors and Senior Management
The following table sets forth, as of June 30, 2006, the name, age and
position of each of our directors and executive officers:(1)
Charles R. Bronfman 76 Chairman of the Board of Directors
Rolando Eisen(2)(3)(4) 65 Director
Paulette Eitan(2)(3)(5) 61 Director
Ron Feinstein(2) 69 Director
Andrew Hauptman(4) 38 Director
Chemi Peres 49 Director
Dan Propper(4) 65 Director
David Rubner 67 Director
Prof. Gabriela Shalev(2)(4) 65 Director
Jonathan B. Kolber 45 Chief Executive Officer
Danny Biran 64 President
Ran Maidan 35 Senior Vice President and Chief
Financial Officer
Aaron Zuker 61 Vice President
Shlomo Heller 63 General Counsel and Corporate
Secretary
________________________
(1) Following the transfer of 5,081,033 of our shares to Discount Investment
Corp. on July 3, 2006 described in Item 4 "Information on the Company -
Business Overview - Major Shareholders", seven of our current directors
resigned from our Board of Directors, namely Mr. Charles R. Bronfman, Mr.
Andrew Hauptman, Adv. Roni Feinstein, Mr. Chemi Peres, Mr. Dan Propper,
Mr. David Rubner and Prof. Gabriela Shalev. The following five new
directors were nominated - Mr. Nochi Dankner, Mr. Avi Fischer, Mr. Zvi
Livnat, Mr. Yitzhak Manor and Mr. Ami Erel. The final composition of the
Board of Directors will be determined within the next few weeks.
Furthermore, we expect that changes in the composition of our management
will occur.
(2) Member of the Audit Committee.
(3) External director. Under the Israeli Companies Law, 1999, publicly held
companies in Israel are required to appoint at least two "external
directors" who serve for three-year terms, as described below. Our
external directors were appointed in June 2002 and pursuant to the
Companies Law, their terms expired on June 24, 2005. At our annual general
meeting of shareholders held on July 3, 2005, our shareholders voted to
re-appoint our external directors for a second term of three years.
(4) Member of the Remuneration Committee.
(5) Serves as the Audit Committee Financial Expert.
Set forth below is a biographical summary of each of our above-named
directors and executive officers.
Charles R. Bronfman has been Chairman of the Board of Directors of Koor
since November 1997. Mr. Bronfman is Chairman of the Board of Directors of
Claridge Israel L.L.C.,
65
Chairman of Andrea and Charles Bronfman Philanthropies Inc., Co-Chairman of
Birthright Israel International and Co-Chairman of the Board of Trustees,
McGill Institute for the Study of Canada. Mr. Bronfman is a former Co-Chairman
of the Seagram Company Ltd. and a former Chairman of the United Jewish
Communities.
Rolando Eisen has been an external director of Koor since June 2002.
Mr. Eisen serves as a board member in I.D.B. Holdings Ltd. (external director)
and Healthcare Technologies Ltd. which is traded on NASDAQ. Mr. Eisen is a
co-founder and was the Managing Director of Rim Industries Ltd. Mr. Eisen has a
B.Sc. in Industrial Management from Carnegie Mellon University. Mr. Eisen is an
Israeli citizen.
Paulette Eitan has been an external director of Koor since June 2002.
Ms. Eitan is the Managing Director of Paulette Eitan, Business Planning
Services Ltd., a management consulting firm focusing on business strategy,
performance, monitoring and management incentive programs, mostly for Israeli
high-tech and multinational companies. Ms. Eitan also serves as a board member
of Ham-Let Israel Canada Ltd. (external director). Ms. Eitan has an M.B.A. from
Tel Aviv University and a B.Sc. in Economics and Business from HEC-Paris. Ms.
Eitan is an Israeli citizen.
Ron Feinstein has been a director of Koor since October 1991. Since
1999, Mr. Feinstein has served as a Chairman of the Board of Directors of
Sheraton Moriah Israel Ltd. From 1996 until 1998, Mr. Feinstein served as a
Chairman of the Board of Radisson Moriah Hotels Ltd. Between 1992 and 1998, Mr.
Feinstein also served as the Chairman of the Board of Tourist Industry
Development Corporation Ltd. Mr. Feinstein was a partner in the law firm of
Glass, Feinstein and Bar-Sela from 1981 through March 1997 and since then he is
self-employed at his own law firm. Mr. Feinstein is presently a member of the
Board of Directors of Migdal Insurance Corp. and the Chairman of the Board of
Directors of Am-Oved Publishers Ltd.
Andrew Hauptman has been a director of Koor since November 1997. Mr.
Hauptman is the Co-Chairman and Chief Executive Officer of Andell Holdings LLC,
a private investment firm. Mr. Hauptman serves on the Board of Directors of
several privately held and publicly traded companies, including Canyon Ranch
Holdings LLC, Dick Clark Productions and Elizabeth Arden Red Door Salons LLC,
Mr. Hauptman also serves as the Chairman of the Board of Storage Mobility LLC,
as well as Andell Entertainment. In addition, Mr. Hauptman serves on the Board
of Trustees of the Los Angeles County Museum of Art, the Zoe Saidye Hauptman
Memorial Fund, The Hauptman Family Foundation and The Charles Bronfman Prize,
as well as being a member of the Yale University Council, an advisory board to
the President. Prior to joining Andell Holdings LLC, Mr. Hauptman worked in
restructuring and mergers and acquisitions with Alex. Brown & Sons in New York.
Later her worked with Universal Studios in London and played a key role in the
oversight of its international operations, focusing primarily on the music and
filmed entertainment groups. Mr. Hauptman holds an M.B.A. from Harvard
University and a B.A. in History from Yale University. Mr. Hauptman is the
son-in-law of Charles R. Bronfman, our Chairman of the Board.
Chemi Peres has been a director of Koor since June 2000. Mr. Peres is
a co-founder and Managing Director of Pitango Venture Capital, an Israeli
venture capital fund. In 1992, Mr. Peres founded and managed the Mofet Israel
Technology Fund, a venture capital fund publicly
66
traded on the Tel Aviv Stock Exchange. Prior to founding Mofet, Mr. Peres
served as Vice President of Marketing and Business Development at Decision
Systems Israel Ltd, and as a Senior Consultant to Israel Aircraft Industries
Ltd. Mr. Peres currently serves on the board of several Pitango portfolio
companies, including Go Networks Ltd., Mercado Software Ltd., Provigent Ltd.,
Radwin Ltd. and Voltaire Ltd.. Mr. Peres also serves as a board member of the
Israel Venture Association, the Ministry of Industry, the Trade Seed Fund and
the Weizman Institute of Science. Mr. Peres holds an M.B.A. and a B.Sc. in
Industrial Engineering and Management from Tel Aviv University.
Dan Propper is the Chairman of the Osem Group of Companies, one of
Israel's leading food manufacturers and a public company traded on the Tel Aviv
Stock Exchange. Mr. Proper is a member of the boards of various industrial
companies as well as the Technion, Israel Institute of Technology, the Weizman
Institute of Science and Ben-Gurion University. Mr. Propper graduated summa cum
laude from the Technion with a degree in chemical engineering and food
technology. In 1999, he received an honorary doctorate from the Technion for his
contribution to Israeli industry and economy. Between the years 1993-1999 Mr.
Propper served as the President of the Israeli Manufacturers Association.
David Rubner has been a director of Koor since June 2000. Mr. Rubner
is the Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd.
and a partner in Hyperion Israel Advisors Ltd., a venture capital firm. Mr.
Rubner was employed by ECI from 1970 until February 2000, and served as its
President and Chief Executive Officer from 1991 to October 1999 and February
2000, respectively. Mr. Rubner serves on the board of directors of Checkpoint
Software Ltd., Elbit Imaging Ltd. and Lipman Electronic Engineering Ltd., as
well as several privately held companies. Mr. Rubner also serves on the board
of trustees of Bar-Ilan University and Shaare Zedek Hospital. Mr. Rubner holds
a B.Sc. in Engineering from Queen Mary College, University of London and a
M.Sc. degree from Carnegie Mellon University.
Prof. Gabriela Shalev has been a director of Koor since February 1999.
Prof. Shalev is the President and Rector of Ono Academic College. Prof. Shalev
also serves on the board of directors of several other companies, including Teva
Pharmaceutical Industries Ltd. and Osem Ltd.
Jonathan B. Kolber has been Chief Executive Officer of Koor since July
1, 1998. Mr. Kolber served as the Vice Chairman of the Board of Directors of
Koor from November 1997 until he resigned from the Board on March 26, 2003. Mr.
Kolber served as President of Claridge Israel Ltd. from 1989 to 2001 and as
Vice President of Claridge Inc. from 1986 to 1990. Mr. Kolber was associated
with Cemp Investments from 1985 to 1987. Mr. Kolber serves as a director of
several Israeli companies, including ECI Telecom Ltd., MA Industries Ltd,
Telrad Networks Ltd., Elbit Systems Ltd., Knafaim-Arkia Holdings Ltd., and
Sheraton-Moriah (Israel) Ltd. Mr. Kolber has a B.A. in Near Eastern Languages
and Civilizations from Harvard University and a Certificate on Advanced Arabic
from the American University of Cairo.
Danny Biran has been President of Koor since July 1, 1998. Mr. Biran
currently serves as Chairman of the Board of Makhteshim Agan Industries Ltd., A
Industries, Isrex (94) Ltd., Koor Trade Ltd. R.M. Renaissance Management (1993)
Ltd., and Dekolink Wireless Ltd. Mr. Biran is
67
also a director of ECI and Sheraton-Moriah. Mr. Biran is a graduate of the Law
faculty of the Tel Aviv University and a member of the Israeli Bar.
Ran Maidan has been Senior Vice President and Chief Financial Officer
of Koor Industries since August 2005. Prior to joining Koor in 2005, Mr. Maidan
served as Chief Financial Officer of the Elisra Defense Group from March 2003.
Between the years 2000 to 2003 Mr. Maidan was Vice President, Mergers,
Acquisition and Taxation of Koor, and between the years 1999 and 2000 was
Corporate Controller of Koor. During his tenure both at Koor Industries' and
Elisra Mr. Maidan served on the Board of several Israeli companies, private and
public. Between the years 1995 to 1999 Mr. Maidan was an Audit Manager at KPMG
Somekh Chaikin. Mr. Maidan currently serves as a director of MA Industries Ltd.,
Telrad Networks Ltd.and Sheraton Moriah Israel Ltd. Maidan holds an MBA and
Bachelor degree in Accounting and Economics, both from the Bar-Ilan University,
and is a Certified Public Accountant in Israel.
Aaron Zuker has been a Vice President of Koor since January 1999. He
serves as Managing Director of R.M. Renaissance Management (1993) Ltd. Mr. Zuker
is a director of MA Industries Ltd. Mr. Zuker is also a director of Isrex (94)
Ltd., Clalcom Ltd. and Barak ITC (1995). Between the years 1990 - 1995, Mr.
Zuker served as Chief Financial Officer and then Chief Executive Officer of The
Jerusalem Report Publication.
Shlomo Heller has been General Counsel and Corporate Secretary of Koor
since August 1997. From 1990 to 1997, Mr. Heller served as the General Counsel
of United Mizrahi Bank Ltd. Mr. Heller also serves as a director of several
other companies within Koor.
Compensation
The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (15 persons, including 12 months
compensation to our former Chief Financial Officer) during 2005 consisted of
approximately $4.4 million, in salaries, fees, bonuses, commissions and
directors' fees and $0.6 million to provide pension, retirement or similar
benefits, excluding expenses (including business travel, professional and
business association dues and expenses) reimbursed to officers and other fringe
benefits commonly reimbursed or paid to such officers and directors by companies
in Israel.
All of our directors received compensation identical to that received
by our external directors as described below.
Compensation and reimbursement for external directors (as described
below) is statutorily determined pursuant to a formula stated by the Israeli
Companies Law, 1999, which became effective on February 1, 2000, and which we
refer to in this annual report as the Companies Law, and we adopted the highest
compensation payable pursuant to the formula. Compensation and reimbursement of
all other directors who do not serve as officers are the same as the statutory
rates paid to external directors pursuant to a decision of our shareholders at
our annual general meeting. For additional information concerning the
compensation of directors, see Note 26B to our consolidated financial statements
included elsewhere in this annual report.
68
In addition, according to decisions of our shareholders at the annual
general meetings of shareholders held on July 23, 2003, and September 12, 2004,
eight directors (including the external directors) who are not associated with
Claridge Israel L.L.C. or with Esarbee Investments Limited and who are not
related to the controlling shareholders, have each been granted 50,000 options
under the 2003 Stock Option Plan which is described below. One of these
directors has since resigned.
We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.
Board Practices
Composition of Board; Election of Directors
Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than five. The appointment of
members to the board of directors, their replacement and removal, and the
appointment of the chairman of the board of directors requires approval by our
shareholders by ordinary resolution. Each member of the board of directors
remains in office until his/her office is vacated due to any one of the
following events: death, legal incompetence, bankruptcy, resignation or removal
at a shareholders meeting. Our chief executive officer is appointed by the board
of directors. Our executive officers serve at the discretion of our chief
executive officer pursuant to powers delegated to him by our board of directors.
The board may appoint committees of the board and delegate to such
committees the powers of the board as it deems appropriate, unless the Companies
Law restricts it. Notwithstanding the foregoing, the board may, from time to
time, revoke the delegation made to a committee of its powers and authorities or
a portion thereof. The board has appointed an Audit Committee and a Remuneration
Committee.
External Directors; Independent Directors
Israeli Companies Law Requirements
Under the Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public inside or outside of Israel
are required to appoint at least two "external directors". The Companies' Law
provides that a person may not be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment to serve as an
external director, or had during the two years preceding that date, any
affiliation with us or any entity controlling, controlled by or under common
control with us. The term "affiliation" includes:
o an employment relationship;
o a business or professional relationship maintained on a regular
basis;
o control; and
69
o service as an office holder.
No person may serve as an external director if the person's position or
other business activities create, or may create, a conflict of interest with the
person's responsibilities as an external director or may otherwise interfere
with the person's ability to serve as an external director.
Under a recent amendment to the Companies Law, at least one of the
external directors is required to have "financial and accounting expertise" and
the other external directors are required to have "professional expertise". The
terms "financial and accounting expertise" and "professional expertise" have
been defined by regulations adopted according to the Companies Law.
External directors are to be elected by majority vote at a
shareholders' meeting, provided that either:
(1) The majority of shares voted at the meeting, including at
least one-third of the shares of the non-controlling shareholders voted
at the meeting, vote in favor of election of the director; or
(2) The total number of shares of non-controlling shareholders
voted against the election of the director does not exceed one percent
of the aggregate voting rights.
The initial term of an external director is three years and may be
extended for an additional three years. Both of our external directors are
members of our audit committee and one of them is a member of our remuneration
committee.
An external director is entitled to compensation as provided in the
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an external director.
New York Stock Exchange Requirements
Our ADSs are listed on the New York Stock Exchange, or NYSE, and we are
subject to the rules of the NYSE applicable to listed companies. Under the
current NYSE rules, we are required to have an audit committee consisting of at
least three directors, all of who must be independent. The independence standard
under the NYSE rules generally excludes (1) any person who is an employee of a
company or its affiliates or any person who is an immediate family member of an
executive officer of a company or its affiliates, until the lapse of three years
from the termination of such employment, (2) any person who is a partner,
controlling shareholder or executive officer of an organization that has a
business relationship with a company or who has a direct business relationship
with a company, unless the board of directors of the company determines that the
business relationship does not interfere with such person's independent
judgment, or unless three years have lapsed from the termination of such
relationship or his status as a partner, controlling shareholder or executive
officer, and (3) any person who is employed as an executive of another
corporation where any of the company's executives serves on that corporation's
compensation committee. See " - Audit Committee - New
70
York Stock Exchange Requirements" for a description of the NYSE rules that
became effective with respect to Koor on July 31, 2005.
Audit Committee
Israeli Companies Law Requirements
The Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee under the Companies Law
include identifying irregularities in the management of our business and
approving related party transactions as required by law. The audit committee is
also responsible for recommending to our shareholders the appointment of our
external auditors, for approval of the amounts to be paid to our external
auditors and for assisting our board of directors in overseeing the work of our
external auditors. The audit committee has also adopted procedures for handling
complaints regarding accounting and auditing matters, including anonymous and
confidential methods for addressing concerns raised by employees. Under the
Companies Law, an audit committee must consist of at least three directors,
including at least two external directors. The chairman of the board of
directors, any director employed by or otherwise providing services to us, and a
controlling shareholder or any relative of a controlling shareholder, may not be
a member of the audit committee.
New York Stock Exchange Requirements
Under the current NYSE rules, we are required to maintain an audit
committee consisting of independent directors, all of whom are financially
literate and one of whom has accounting or related financial management
expertise. Our audit committee complies with these requirements. The
responsibilities of the audit committee under the NYSE rules include evaluating
the independence of a company's outside auditors.
Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission, or SEC, issued new rules which, among other things, require the NYSE
to impose independence requirements on each member of the audit committees of
listed companies. The NYSE adopted rules that comply with the SEC's requirements
and became effective with respect to Koor on July 31, 2005.
The requirements implement two basic criteria for determining
independence: (i) audit committee members would be barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the member's capacity as a member of the board of
directors and any board committee, and (ii) audit committee members of an issuer
that is not an investment company may not be an "affiliated person" of the
issuer or any subsidiary of the issuer apart from his or her capacity as a
member of the board and any board committee.
The SEC has defined "affiliate" for non-investment companies as "a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is intended to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession,
71
direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise." A safe harbor has been adopted by the
SEC, under which a person who is not an executive officer, director or 10%
shareholder of the issuer would be deemed not to have control of the issuer.
The SEC has also provided certain limited exceptions for an audit committee
member, who also sits on the board of directors of an affiliate to a listed
issuer, so long as, except for being a director on such board of directors, the
audit committee member otherwise meets the independence requirements for each
entity.
The role of the audit committee for NYSE purposes includes assisting
our board of directors in fulfilling its responsibility for oversight of the
quality and integrity of our accounting, auditing and reporting practices.
Remuneration Committee
The remuneration committee is responsible for determining the
compensation for all our executive officers, which determinations are subject to
approval by our audit committee and board of directors. The remuneration
committee is also responsible for setting the annual bonus compensation, on an
aggregate basis, for all our employees.
Internal Auditor
Under the Companies Law, the board of directors must appoint an
internal auditor, nominated by the audit committee. The role of the internal
auditor is to examine, among other matters, whether our actions comply with the
law and with orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of ours but not an office holder, or an affiliate, or
a relative of an office holder or affiliate, and may not be our independent
accountant or its representative. We have appointed Mr. Ezra Yehuda, CPA, who is
not an employee of ours, as our internal auditor in accordance with the
requirements of the Companies Law and his reports are submitted to and reviewed
by the Chairman of our board of directors and the audit committee. The audit
committee follows up on the implementation of the recommendations of the
internal auditor.
Summary of Significant Differences between Koor's Corporate Governance
Practices and Those Required of U.S. Companies under NYSE Listing Standards
Section 303A.11 of the NYSE's Listed Company Manual, or LCM, requires
that listed foreign private issuers, such as Koor, must disclose any significant
ways in which their corporate governance practices differ from those followed by
U.S. domestic companies under NYSE listing standards.
Our corporate governance practices are governed by our Articles of
Association, by the corporate governance provisions set forth in the Companies
Law and by applicable U.S. securities laws, including the Sarbanes-Oxley Act of
2002, to the extent they apply to foreign private issuers. We are also subject
to the NYSE corporate governance rules to the extent they apply to foreign
private issuers. Except for those specific rules, foreign private issuers are
permitted to follow home country practice in lieu of the provisions of Section
303A of the LCM.
72
In order to comply with Section 303A.11 of the LCM, the following is a
summary of significant ways in which our corporate governance practices differ
from those required to be followed by U.S. domestic companies under the NYSE's
listing standards.
Majority of Independent Directors: Under Section 303A.01 of the LCM,
U.S. domestic listed companies must have a majority of independent directors. We
do not have a similar requirement under Israeli practice or the Companies Law,
however we do have a majority of independent directors serving on our board of
directors.
Separate Meetings of Non-Management Directors: Under Section 303A.03
of the LCM, the non-management directors of each U.S. domestic listed company
must meet at regularly scheduled executive sessions without management. We do
not have a similar requirement under Israeli practice or the Israeli Companies
Law, and our independent directors do not meet separately from directors who are
not independent, other than in the context of audit committee meetings.
Nominating/Corporate Governance Committee: Under Section 303A.04 of the
LCM, a U.S. domestic listed company must have a nominating/corporate governance
committee composed entirely of independent directors. We are not required to
have such a committee under the Companies Law.
Compensation Committee: Under Section 303A.05 of the LCM, a U.S.
domestic listed company must have a compensation committee composed entirely of
independent directors. We do have a remuneration committee, which is similar to
a compensation committee, although there is no requirement for a compensation
committee under Israeli practice or the Companies Law. However, our remuneration
committee is composed entirely of independent directors.
Audit Committee: Under Section 303A.06 of the LCM, domestic listed
companies are required to have an audit committee that complies with the
requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule
10A-3 requires the audit committee of a U.S. company to be directly responsible
for the appointment, compensation, retention and oversight of the work of any
registered public accounting firm engaged for the purpose of preparing or
issuing an audit report or performing other audit, review, or attest services,
and that each such firm must report directly to the audit committee. Among other
exceptions, Rule 10A-3 provides an exception to such standards for foreign
private issuers where applicable home country law (i) requires or permits
shareholders to appoint the auditors or (ii) prohibits or limits the delegation
of responsibility to the issuer's audit committee.
Pursuant to the Companies Law, our auditors are appointed by the
shareholders at the annual meeting of shareholders. Our audit committee is
responsible for recommending to the shareholders the appointment of our auditors
and to recommend the amounts to be paid to our auditors. In addition, pursuant
to the Companies Law, our financial statements must be approved by our board of
directors. Our audit committee is responsible for assisting the board of
directors in overseeing the work of our auditors.
Equity Compensation Plans: Under Section 303A.08 of the LCM,
shareholders must be given the opportunity to vote on all equity-compensation
plans and material revisions thereto,
73
with certain limited exemptions as described in the Rule. We intend to follow
the requirements of the Companies Law under which requirement for shareholder
approval is generally limited to cases where our directors would be entitled to
receive equity under the equity-compensation plan.
Corporate governance guidelines: Under Section 303A.09 of the LCM,
domestic listed companies must adopt and disclose their corporate governance
guidelines. We do not have a similar requirement under Israeli practice or the
Companies Law.
Employees
At December 31, 2005, we had 2,318 employees worldwide, which
represented a decrease of 65% from year-end 2004. The decrease in the number of
employees is due to the deconsolidation of MA Industries and Telrad described
elsewhere in this annual report.
The table below sets forth the number of our employees on a
consolidated basis and a break down of their geographic location at the end of
each of the last three fiscal years:
Latin
Israel America USA Europe Others Total
2003 4,605 993 311 329 90 6,328
2004 4,732 965 369 373 120 6,559
2005 1,838 14 251 121 94 2,318
Our future success will depend in part upon our ability to attract and
retain highly skilled and qualified personnel. Although competition for such
personnel in Israel is generally intense, we believe that adequate personnel
resources are currently available in Israel to meet our requirements.
Israeli law generally requires the payment by employers of severance
upon the death of an employee, his retirement or upon termination of employment
by the employer without due cause. We currently fund our ongoing severance
obligations by making monthly payments to approved severance funds or insurance
policies. In addition, according to the National Insurance Law, Israeli
employers and employees are required to pay predetermined sums to the National
Insurance Institute, an organization similar to the United States Social
Security Administration. These contributions entitle the employees to benefits
in periods of unemployment, work injury, maternity leave, disability, reserve
military service and bankruptcy or winding-up of the employer. Since January 1,
1995, such amount also includes payments for national health insurance. The
payments to the National Insurance Institute are equal to approximately 15.93%
of an employee's wages limited to a specified amount, of which the employee
contributes approximately 63% and the employer contributes approximately 37%.
We are subject to various Israeli labor laws, collective bargaining
agreements at our affiliates, Israeli labor practices, as well as orders
extending certain provisions of collective bargaining agreements between the
Histadrut (currently the largest labor organization in Israel) and the
Coordinating Bureau of Economic Organizations (the federation of employers'
organizations). Such laws, agreements and orders have a wide scope, including
minimum
74
employment standards (including, among other things, working hours, minimum
wages, vacation and severance pay), and special issues, such as equal pay for
equal work, equal opportunity in employment, and employment of women, youth and
army veterans. According to the National Insurance Law, Israeli employers and
employees are required to pay predetermined sums to the National Insurance
Institute, an organization similar to the United States Social Security
Administration. These contributions entitle the employees to benefits during
periods of unemployment, work injury, maternity leave, disability, reserve
military service, and bankruptcy or the winding-up of the employer, in addition
to health insurance. The National Health Insurance Law 1994 imposes a health
tax at a rate of approximately 4.8% of an employee's base wage.
The collective bargaining agreements of our affiliates cover a term of
one to three years, or are for an indefinite period. Upon expiration of the term
of an agreement, and pending negotiations for extension, the provisions of the
agreement remain in force unless one of the parties gives a notice of
termination or a new collective agreement is entered into which explicitly
terminates the previous collective agreements. Management believes that, upon
expiration of such existing agreements, its subsidiaries will be able to
negotiate, without material disruptions to our businesses, satisfactory new
agreements. However, there can be no guarantee that satisfactory agreements will
be reached in each subsidiary or that the negotiation of such agreements will
not generate material disruptions to our businesses.
Several of our affiliates have collective retirement agreements. These
agreements are due to expire in 2006. Unlike the collective bargaining
agreements, because these agreements have a termination date, the provisions of
these agreements will not remain in force in the period between the expiration
and the signing of an alternative agreement.
In 2005, our total labor costs amounted to approximately NIS 203
million, which represented approximately 21% of our total net sales, compared to
NIS 1,057 million in 2004. The decrease in labor costs is due to the
deconsolidation of MA Industries and Telrad described elsewhere in this annual
report. Labor costs of our discontinued operations, Elisra and Koor Trade
amounted to approximately NIS 392 million in 2005, or 35% of the net sales of
the discontinued operations, compared to NIS 427 million in 2004. The majority
of our labor costs is denominated in NIS and is affected by the periodic changes
in the inflation rate in Israel.
Share Ownership
Our directors and executive officers who are deemed to have beneficial
ownership of more than 1% of our outstanding ordinary shares are Mr. Charles R.
Bronfman, Mr. Andrew Hauptman and Mr. Jonathan Kolber. Mr. Charles R. Bronfman
and Mr. Andrew Hauptman are affiliated with Claridge Israel L.L.C., one of our
major shareholders, and Mr. Kolber is affiliated with Anfield Ltd. For details
of their shareholdings, please see "Item 7. Major Shareholders and Related
Party Transactions" and the related footnotes.
As of June 30, 2006, our executive officers, in the aggregate, held
204,731 ordinary shares and 40,000 options under our stock option plans to
purchase up to 40,000 ordinary shares. These options have an exercise price of
NIS 208.6 per share and an expiration date of December 31, 2010.
75
The 2003 Stock Based Compensation Plan
On July 27, 2003, at our annual general meeting of shareholders, our
shareholders approved the 2003 Stock-Based Compensation Plan, which had been
previously approved by our audit committee and by our board of directors, on May
25, 2003 and June 5, 2003, respectively. A framework was approved for the
allotment of up to 1,200,000 stock options exercisable for up to 1,200,000 of
our ordinary shares, out of which 1,112,903 options have been granted.
Under the terms of the 2003 plan, each stock option is theoretically
exercisable for one share, subject to adjustments. However, in practice,
offerees who exercise the options will not be allotted the full quantity of
shares underlying each option, but only shares which reflect the amount of the
monetary bonus inherent in their option, computed on the date of exercise.
Accordingly, the exercise price of each stock option is intended only for
computation of the bonus component.
The options are designated for directors and employees who are not
related parties and will not become related parties as a result of allotment of
the stock options. In any event, the total number of offerees under the 2003
plan will not exceed 35 offerees, excluding our directors and chief executive
officer.
The options will vest gradually over a three-year period from the
record date, with one-sixth of the total number of options vesting every six
months.
In connection with the approval of the 2003 plan, our shareholders
approved the granting a total of 400,000 options out of the total number of
options allotted under the 2003 plan to eight directors, including one director
who has since resigned (the two directors who are controlling shareholders,
directly or indirectly, were not granted any options), divided equally, as well
as 175,000 options out of the total number of options allotted under the 2003
plan to our chief executive officer. The balance of the options allotted under
the 2003 plan is intended for other employees and officers of the Koor Group.
As of June 30, 2006, 350,944 options to purchase our ordinary shares
were outstanding, as follows:
Balance of
stock options Exercise Expiration
Not exercised Price date
--------------- ------------- ---------------
NIS
-------------
227,944 99.5 12/2010
13,000 182.9 12/2010
50,000 193.4 12/2010
40,000 208.6 12/2010
10,000 219.0 12/2010
10,000 229.6 12/2010
---------------
350,944
===============
76
Option Plans of Certain Subsidiaries
In April 2001, the board of directors of MA Industries decided to
distribute options to employees of MA Industries and its consolidated companies.
According to this plan, during 2002 and 2003, 17,400,000 options were allocated,
each of which is exercisable into one ordinary share of MA Industries. Following
the exercise of options, as of March 31, 2006, 2,985,372 options to purchase
shares of MA Industries were outstanding under this plan.
In April 2003, the board of directors of MA Industries approved a
framework for the allotment of 17,000,000 stock options, each of which is
exercisable into one ordinary share of MA Industries. Out of the framework,
3,400,000 options were allotted to the Chief Executive Officer and to directors
of MA Industries, and following the exercise of options, 4,495,341 options
remained outstanding as of March 31, 2006.
On March 8, 2005, the board of directors of MA Industries adopted a new
option plan for its and its subsidiaries' officers and employees. Under the
terms of the plan, on March 14, 2005, 14,900,000 stock options, each of which is
exercisable into one ordinary share of MA Industries, were allotted, including
2,500,000 options that were deposited with a trustee for future distribution.
Out of the total number of options allotted under the plan, 800,000 options were
granted to MA Industries' chief executive officer. On March 8, 2006, the board
of directors of M-A Industries resolved to issue the balance of the options
under the plan to employees. As of March 31, 2006, 14,900,000 options were
outstanding under this plan.
All the options of MA Industries will be exercised for shares in a
quantity reflecting the amount of the financial benefit inherent in the options,
according to the Bonus Component Method.
Item 7. Major Shareholders and Related Party Transactions.
-------------------------------------------------
Major Shareholders
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of June 30, 2006 with respect to
each person known to us to be the beneficial owner of 5% or more of our
outstanding ordinary shares. None of our major shareholders has any different
voting rights than any other shareholder.
Number of Percentage of
Ordinary Outstanding Ordinary
Shares Shares
Name Beneficially Owned (1)
---- ------------------- ---------------------
Claridge Israel L.L.C. (2)(3)................................ 2,375,835 14.74%
Esarbee Investments Limited (4).............................. 2,271,167 14.09%
IDB Development Corporation Ltd. (5) ........................ 1,630,214 10.11%
All officers and directors as a group (14 persons) (6)....... 1,130,925 7.02%
77
_________________
(1) Based upon 16,446,964 ordinary shares issued and outstanding on
June 30, 2006, which amount excludes 15,799 ordinary shares held
by one of our wholly-owned subsidiaries, which according to the
Companies Law do not confer voting rights while held by a
subsidiary. The respective numbers of ordinary shares listed as
beneficially owned in the table above, and the percentage of
outstanding ordinary shares represented thereby, do not give
effect to ordinary shares issuable upon exercise of options
granted pursuant to the 2003 plan, which are exercisable within
60 days of this annual report. See "Item 6. Directors, Senior
Management and Employees," and Note 20 to our consolidated
financial statements included elsewhere in this annual report.
(2) Claridge Israel L.L.C., a Delaware limited liability company, is
mainly (99%) owned by The Charles Bronfman Trust. The Charles
Bronfman Trust is a trust established under the laws of the U.S.
primarily for the benefit of Ellen J. Bronfman Hauptman and her
issue. Mr. Andrew Hauptman, one of our directors is the husband
of Mrs. Ellen J. Bronfman Hauptman, the daughter of Charles R.
Bronfman, our Chairman of the Board.
The holdings of the Claridge Israel L.L.C. in our ordinary shares
were pledged in favor of Bank Hapoalim as a guarantee for a loan
that was given to Claridge Israel L.L.C. by Bank Hapoalim.
(3) Excluding 119,316 shares held by CBT Holdings L.L.C. a Delaware
limited liability company held by The Charles Bronfman Trust.
(4) Esarbee Investments Limited, a company registered in Canada, is
owned by The Charles Rosner Bronfman Family Trust. The Charles
Rosner Bronfman Family Trust is a trust established under the
laws of Canada primarily for the benefit of Stephen R. Bronfman
and his issue. Mr. Stephen R. Bronfman is the son of Charles R.
Bronfman, our Chairman of the Board.
The holdings of the Esarbee Investments Limited in our ordinary
shares were pledged in favor of Bank Hapoalim as a guarantee for
a loan that was given to Esarbee Investments Limited by Bank
Hapoalim.
An additional 120,046 shares are held by The Charles Rosner
Bronfman Family Trust.
An additional 104,669 shares are held by the Charles R. Bronfman
trust, a trust established under the laws of New York primarily
for the benefit of Charles R. Bronfman and Stephen R. Bronfman.
(5) IDB Development Corporation Ltd., or IDBD is controlled (66%) by
IDB Holding Corporation Ltd., or IDBH. Both IDBD and IDBH are
public Israeli companies traded on the Tel Aviv Stock Exchange.
Approximately 51.7% of the outstanding share capital of IDBH is
owned by a group comprised as follows: (i) 31.02% is held by
Ganden Investments I.D.B. Ltd., a private Israeli company
controlled by Nochi
78
Dankner and his sister, Shelly Bergman; (ii) 10.34% is held by
Manor Investments-IDB Ltd., a private Israeli company controlled
by Ruth Manor; and (iii) 10.34% is held by Avraham Livnat
Investments (2002) Ltd., a private Israeli company controlled by
Avraham Livnat. The members of this group entered into a
shareholders agreement relating to, among other things, their
joint control of IDBH, the term of which expires in May 2023. In
addition to her holdings as a controlling shareholder in one of
the members of this group, as described above, Shelly Bergman
separately holds approximately 4.9% of IDBH's outstanding share
capital.
On May 1, 2006, Discount Investment Corp. Ltd., a subsidiary of
IDBD, signed an agreement, to acquire from Claridge Israel
L.L.C., Esarbee Investments Limited, The Charles Rosner Bronfman
Family Trust, CBT Holdings L.L.C., the Charles R. Bronfman Trust,
Anfield, Ltd. (see note 6 below) and another company related to
the family of Jonathan B. Kolber (which holds 90,000 shares of
our Company), all of our shares held by those entities totaling
5,753,207 shares, or approximately 34.9% of our outstanding
shares, for $445.8 million. All approvals to which the
transaction was subject, including Israel's anti-trust
commissioner, have been granted. On July 3, 2006, this
transaction closed and 5,081,033 of our shares, or approximately
30.9% of our outstanding shares, were transferred to Discount
Investments Corp., for approximately $394 million, and a put
option, exercisable during December 2006, was granted to Anfield
Ltd. in respect of the remaining 672,174 shares. Discount
Investments is held 74.2% by IDBD, which also directly holds 10%
of our outstanding ordinary shares, as described above.
(6) Includes (i) 218,334 options to purchase our ordinary shares held
by several of our directors and officers, which are exercisable
within 60 days of the date of this annual report, (ii) 258,157
ordinary shares held by several of our directors and officers and
(iii) 672,174 ordinary shares, representing 4.08% of our
outstanding ordinary shares, held by Anfield, Ltd., a company
registered in Israel and owned by Jonathan B. Kolber, our Chief
Executive Officer. The holdings of Anfield in our ordinary shares
were pledged in favor of Bank Hapoalim as a guarantee for a loan
that was given to Anfield by Bank Hapoalim. Does not include the
ordinary shares held by Claridge Israel L.L.C., which may be
deemed beneficially owned by Ellen J. Bronfman Hauptman and
Andrew Hauptman as described in footnote 2 above, or the ordinary
shares held by Esarbee Investments Limited described in footnote
4 above.
As of December 31, 2005, we had 50 ADS holders of record in the United
States, holding ADSs representing approximately 4.3% of our outstanding ordinary
shares, as reported by The Bank of New York, the depositary for our ADSs.
To our knowledge, (A) we are not directly or indirectly owned or
controlled (i) by another corporation or (ii) by any foreign government and (B)
there are no arrangements, the operation of which may at a subsequent date
result in a change in control of our company.
79
Related Party Transactions
For details regarding transactions and loans between us and related
parties, please see Note 26 to our consolidated financial statements included
elsewhere in this annual report.
Item 8. Financial Information.
---------------------
Consolidated Statements and Other Financial Information
See "Item 17. Financial Statements" and pages F-1 through F-146.
Legal Proceedings
Restrictive Trade Practices
On September 21, 2004, a suit was filed against us, Bezeq - the Israel
Telecommunications Company Ltd., or Bezeq, Tadiran Ltd. (a subsidiary of Koor),
Tadiran Telecommunications Ltd. (a former subsidiary of Koor which was merged
with ECI), Tadiran Public Switching Ltd., (a former subsidiary of Telrad
Telecommunications Ltd.), and Telrad alleging that during the previous decade,
the defendants had engaged in activities prohibited by the Israeli Anti-Trust
Law that resulted in damages to Bezeq's customers. A motion for recognition of
the suit as a class action was filed together with the suit in accordance with
the Israeli Anti-Trust Law. The plaintiff is asking for damages for the group
that he is seeking to represent in the amount of NIS 1.7 billion.
On March 10, 2005, we and the other defendants submitted to the
District Court an objection to the plaintiff's request to certify the claim as a
class action, and the plaintiff has filed its response to the objection. As of
the date of this annual report, a date has not yet been set for the start of the
court proceedings.
Based on advice from our legal counsel, we believe the chances for the
suit and for the action to be recognized as a class action are remote.
In connection with the sale of shares of Telrad Networks, Koor
committed to indemnify the purchasers in the event that a court ruling will
increase the amount of expenses to be paid by Telrad Networks to an amount
exceeding that stated in the share purchase agreement.
On June 1, 2005, an indictment was filed with the Jerusalem District
Court prosecuting Koor, and seven other companies that are not members of the
Koor Group (including two companies that had been owned by Koor on the relevant
dates and were later sold to third parties) and nine executives (including two
who had been salaried employees of Koor on the relevant dates) for violations of
the Anti-Trust Law. The indictment was the outcome of an investigation that had
been opened by the Anti-Trust Commission in other companies during 2001, with
respect to price fixing and collusion, and the lack of competition in the frozen
and canned vegetable industry. The Anti-Trust Authority claimed that two
companies that belonged to the Koor Group in the past had colluded with other
companies in the years 1992-1998.
80
On June 18, 2006, the Jerusalem District Court issued a verdict
imposing a penalty of NIS 400,000 on Koor.
Environmental
Pursuant to an agreement with the Ministry of Environmental Protection,
subsidiaries of MA Industries decided to construct facilities for the biological
treatment of waste. Construction of the facility will take approximately three
years. In the estimation of the subsidiary's management, the aggregate
construction cost will be between $30 million and $40 million.
One of MA Industries' subsidiary's plants, together with other chemical
plants, was constructed in Ramat Hovav, since the Government of Israel
determined that the location was suitable for chemical plants as it was assumed
that the layers of the soil in that area were absolutely sealed against
penetration by liquid discharges or contamination. The Ministry of Environmental
Protection conducted tests as a result of which it was reported that data exist
indicating subterranean contamination in Ramat Hovav. The inspectors recommended
that steps be taken to prevent further leakage from active and dormant
installations that are likely to constitute a source of contamination of the
subterranean water in the region. MA Industries' subsidiary may be required to
clean up the relevant areas or subterranean layers if and when it is found that
the subsidiary is responsible for the contamination. Over the past several years
various tests have been performed by different agencies to test the ground
contamination in the Ramat Hovav area as well as the area surrounding the
subsidiary's premises in Be'er Sheva. Based on studies performed by researchers,
including foreign research institutes, there is no effective process for
cleaning the contaminated soil. The only remediation available is the natural
cleansing processes which will clean the land over a period of 80 years. As of
December 31, 2005, in the opinion of MA Industries' Management, no material
consequences on the financial statements are expected due to application of the
recommendations deriving from the said examinations.
In May 2004, a MA Industries' subsidiary and other factories in the
Ramat Hovav area, received a notification of a change in the terms of the
license, according to which the factories will be required to treat their waste,
in contrast with the current treatment, independently and through application of
evaporation procedures, in the framework of which the factories are required to
perform within a short time, research and development for purposes of
conformance of the procedures to the composition of each factory's waste, and
later on to construct an appropriate facility, as well as application of
formulation procedures, in the framework of which the factories are required to
present research and development plans to the Ministry for purposes of
application of the procedures with respect to the waste. At the same time, the
Ministry of Environmental Protection set a date by which the factories are
required to treat their waste in the required format and to stop the flow of
waste into the evaporation pools and waste treatment facilities of the Council
of Ramat Hovav. On November 28, 2004, based on these terms, the Israeli
government reached a decision approving a plan to reduce air and water pollution
deriving from the Ramat Hovav industrial area. The plan calls for, among other
things, (i) more restrictive rules regarding the treatment of sewage by the
plants in the area (derived from the additional business license conditions that
are the subject of the administrative appeal described above) to be complied
with in two stages, the first by June 30, 2006 and the second by December 31,
2007; (ii) the drying and rehabilitation of the vaporization pools in the area
by the Ramat
81
Hovav Industrial Council, to be completed no later than December 31, 2012; and
(iii) the formulation and implementation by the Ministry of Environmental
Protection of a plan to prevent exceptional emission of hazardous materials
into the air from the Ramat Hovav industrial area.
On October 10, 2004, the MA Industries' subsidiary, together with the
Israeli Union of Industrialists and other companies, filed an administrative
petition with the District Court of Be'er Sheva against the Ministry of
Environmental Protection. The subject of the petition is in respect of the
additional conditions for receipt of a business license that were imposed on the
petitioning factories in May 2004 that deal with treatment and removal of waste
accumulated as a result of their operations. As part of the petition, the Court
was requested to issue an order declaring that the additional conditions are
null and void. On March 3, 2005, the Court approved the Parties' consent to
attempt to settle the dispute through "out of court" mediation. In the framework
of the mediation, the Ministry of Environmental Protection hired the services of
a Dutch company having expertise with respect to the matter. The Dutch company's
conclusions supported the MA Industries' position that there is no treatment
method of pressurized ventilation and crystallization for the type of waste
material produced by the Ramat Hovav factories and it recommended to remain in
the Ramat Hovav pools while improving the quality of the waste material and
preventing the escape of odors and pollution into the environment. The matter is
currently in the mediation process. Agreement regarding the proposed method will
also update the conditions of the business license accordingly.
In the estimation of MA Industries' management, based on advice of its
legal counsel, in view of the current preliminary stage of the process, it is
probable that the process will succeed and as a result the additional conditions
to the business license will be modified and reasonable to implement. On June
15, 2006 the parties to the mediation agreed, principally, on a solution to the
controversy aforementioned. According to that understanding, the Ministry of
Environment is supposed to publish, in the near future, new terms to the
business license to industries in the Ramat Hovav area that will replace the
existing conditions. However, in case the mediation fails and the petition is
dismissed, it will have a material effect on the activities of the plant in
Ramat Hovav and/or will require investments of amounts that MA Industries'
management is unable to estimate at this time.
In November 2004, the Board of Directors of MA Industries approved a
master plan for investments in environmental matters as they relate to the
manufacturing sites in Israel. This included approval of investments of
approximately $60 million during the period from 2005 through 2008, the
implementation of which will depend on numerous factors, such as environmental
conditions and technology feasibility studies for the sites), some of which are
beyond MA Industries' control and there is therefore no certainty that they will
take place.
In August 2003, a criminal complaint has been filed against MA
Industries' subsidiary - Makhteshim and one of its officers by the Man, Nature
and Law Foundation. The complaint alleges that in several instances from 1999 to
2003, there were measurements at MA Industries' Ramat Hovav plant of stack
emissions of materials exceeding the permitted concentrations, and that such
emissions created strong air pollution. MA Industries believes the charges in
the complaint are without merit and intends to defend itself against such
charges. In the opinion of MA Industries' management, based on advice from its
legal counsel, due to the early stage of the
82
proceedings, it is not possible to estimate the outcome of the complaint and/or
the resultant exposure. Therefore, the financial statements did not include a
provision in respect of the proceedings.
Claims filed against MA Industries and its foreign subsidiaries
A claim was filed against several parties including a MA Industries
subsidiary in Brazil, for an aggregate amount of $45 million, by a group that
acquired the rights to two banks that had declared bankruptcy. With respect to
the balance of the claim, the subsidiary has been sued as the guarantor of debts
of agricultural cooperatives, which were its former shareholders.
The position of the subsidiary is that it was removed from the
guarantee agreement under the terms of a subsequent agreement between the bank,
the previous shareholders and a subsidiary of the former shareholders. The
subsidiary's financial statements include a provision of $1.6 million, based on
the possibility of a compromise agreement with the plaintiffs. In the estimation
of the subsidiary, based on the opinion of its legal counsel, the provision
recorded is sufficient to cover any possible loss from this claim.
Claims and other monetary demands have been filed against MA
Industries' subsidiary in Brazil, in the aggregate amount of $63.9 million.
Based on the opinion of its legal counsel, the subsidiary's management estimates
that the chances of the subsidiary's success in the proceedings and its defense
against the above claims and demands are high. The subsidiary believes that the
provisions recorded in its financial statements are adequate to cover any
possible damage which may result from these claims.
Claims filed against ECI
In January 2005, ECI was served in connection with a purported class
action complaint filed in the United States Federal District Court for the
District of Maryland against ECtel, certain officers and directors of ECtel, and
ECI. The complaint alleges violations of U.S. Federal Securities laws by ECtel
and breach of fiduciary duties by the individual defendants, in connection with
disclosure of ECtel's financial results between April 2001 and April 2003. The
complaint also alleges that ECI was the controlling shareholder of ECtel during
this period and, as such, influenced and controlled the acts and omissions of
ECtel. Damages claimed by the plaintiff have not yet been quantified. ECI
believes that the allegations made in the complaint with respect to it are
without merit.
Other Claims
A number of claims have been filed against certain other companies
concerning various matters arising in the normal course of business, including
taxes, customs and VAT liabilities. The management of these companies believes,
based on the opinion of the legal counsel handling the claims, that appropriate
provisions in light of the circumstances have been included in the financial
statements.
83
Item 9. The Offer and Listing.
Trading in our ADSs
In the United States, our American Depositary Shares, or ADSs, have
been traded on the NYSE since our initial public offering in October 1995 under
the symbol "KOR" and are evidenced by ADRs. Each ADS represents 0.20 fully paid
ordinary shares. The following table sets forth, for the periods indicated, the
high and low last reported sale prices for our ADSs.
ADSs
-----------------------------
High Low
$ $
------------- -------------
Annual
------
2001...................................... 13.9375 4.1400
2002...................................... 7.2700 2.1000
2003...................................... 7.9600 2.0500
2004...................................... 10.5600 7.0500
2005...................................... 13.1800 9.8000
Quarterly 2004
--------------
First Quarter............................. 8.5700 7.2500
Second Quarter............................ 9.4500 7.0500
Third Quarter............................. 9.5500 7.2500
Fourth Quarter............................ 10.5600 7.5600
Quarterly 2005
--------------
First Quarter............................. 12.2900 9.9100
Second Quarter............................ 13.1800 10.5400
Third Quarter............................. 11.8500 10.0500
Fourth Quarter............................ 11.4200 9.8000
Monthly 2006
------------
January................................... 10.9700 10.3000
February.................................. 10.2800 9.3400
March..................................... 10.6400 9.4500
April..................................... 12.7000 10.3700
May....................................... 12.6500 11.6000
June...................................... 11.6800 10.1600
On June 30, 2006, the closing price of our ADSs on the NYSE was $10.44 per ADS.
The ADSs are issued pursuant to a Deposit Agreement entered into
between us and the Bank of New York, as depository. The Bank of New York's
address is 101 Barclay Street, New York, New York 10286.
84
Trading in our Ordinary Shares
Our securities have been listed on the Tel Aviv Stock Exchange, or
TASE, since 1956. Our ordinary shares have been listed on the TASE since 1991.
The ordinary shares are not listed on any other stock exchange and have not been
publicly traded outside of Israel (other than through ADSs as noted above). The
table below sets forth the high and low last reported prices of our ordinary
shares (in NIS and dollars) on the TASE. The translation into dollars is based
on the average period rate of exchange published by the Bank of Israel.
Ordinary Shares
---------------------------- --------------------------
High Low
---------------------------- --------------------------
NIS $ NIS $
------------ ------------- ----------- -------------
Annual
------
2001............................ 281.20 67.08 89.80 20.34
2002............................ 166.60 36.92 48.60 10.26
2003............................ 171.00 39.05 49.80 11.37
2004............................ 224.90 52.21 165.30 38.37
2005........................... 287.20 64.00 216.60 48.26
Quarterly 2004
--------------
First Quarter................... 188.30 41.59 167.20 36.93
Second Quarter.................. 208.50 46.36 167.40 37.22
Third Quarter................... 211.10 47.10 165.30 36.88
Fourth Quarter.................. 224.90 52.21 173.30 40.23
Quarterly 2005
--------------
First Quarter................... 261.90 60.08 216.60 49.69
Second Quarter.................. 287.20 65.12 229.30 52.00
Third Quarter................... 268.20 59.13 230.70 50.86
Fourth Quarter.................. 263.50 56.72 233.30 50.22
Monthly 2006
------------
January......................... 258.00 55.86 238.50 51.64
February........................ 242.60 51.58 220.10 46.80
March........................... 245.90 52.44 220.40 47.00
April........................... 292.80 63.93 234.00 51.10
May............................. 283.50 63.37 258.90 57.87
June............................ 256.20 57.26 227.40 50.83
On June 30, 2006, the closing price of our ordinary shares on the TASE
was NIS 229.5 (or $51.30) per share.
85
Item 10. Additional Information.
----------------------
Memorandum and Articles of Association
Organization and Register
We are a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the State of
Israel and we have been assigned company number 52-001414-3.
Objects and Purposes
Our objects and purposes include a wide variety of business purposes,
including many types of investments, borrowing and lending, owning and
transacting in real estate, and are set forth in detail in Section 2 of our
memorandum of association.
Directors
Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than five. The appointment of
members to the Board of Directors, their replacement and removal, and the
appointment of the Chairman of the Board of Directors require approval by our
shareholders by ordinary resolution. Each member of the Board of Directors
remains in office until his/her office is vacated due to any one of the
following events: death, legal incompetence, bankruptcy or resignation or upon
removal at a shareholders meeting. Our chief executive officer is appointed by
the Board of Directors. Our executive officers serve at the discretion of our
chief executive officer pursuant to powers delegated to him by our Board of
Directors. The board is authorized to appoint additional directors (whether to
fill a vacancy or create new directorship) to serve until the next annual
shareholders meeting, provided that the total number of directors does not
exceed the maximum set by the general meeting. Compensation of the Board of
Directors is fixed by the general meeting and directors are not required to hold
qualifying shares
A meeting of the board may be called at the request of each director.
The quorum required for a meeting of the board consists of a majority of
directors holding office, for the time being, and entitled under any law to
attend and vote at such meeting, provided that the quorum is not less than
three. In lieu of a board meeting a resolution may be adopted by written
consent.
The board may appoint a committee of the board and delegate to such
committee all or any of the powers of the board, as it deems appropriate.
Notwithstanding the foregoing, the board may, from time to time, revoke the
delegation made to a committee of its powers and authorities or portion thereof.
The board has appointed an audit committee and a remuneration committee, which
have four members each.
The board has borrowing powers that may be exercised in accordance with
our articles of association. Our articles of association are silent with regards
to the retirement age of directors and directors' involvement in matters to
which they are materially interested.
86
Approval of Certain Transactions
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of
loyalty includes avoiding any conflict of interest between the office holder's
position in Koor and his personal affairs, avoiding any competition with Koor,
avoiding exploiting any business opportunity of Koor in order to receive
personal advantage for himself or others, and revealing to Koor any information
or documents relating to Koor's affairs which the office holder has received due
to his position as an office holder. Under the Companies Law, all arrangements
as to compensation of office holders who are not directors require approval of
the board of directors. Arrangements regarding the compensation of directors
also require audit committee and shareholder approval.
The Companies Law requires that an office holder of Koor promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by Koor. In addition, if the transaction is an extraordinary
transaction as defined under Israeli law, the office holder must also disclose
any personal interest held by the office holder's spouse, siblings, parents,
grandparents, descendants, spouse's descendants and the spouses of any of the
foregoing. In addition, the office holder must also disclose any interest held
by any corporation in which the office holder is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint at
least one director or the general manager. An extraordinary transaction is
defined as a transaction other than in the ordinary course of business,
otherwise than on market terms, or that is likely to have a material impact on
Koor's profitability, assets or liabilities.
In the case of a transaction which is not an extraordinary transaction,
after the office holder complies with the above disclosure requirement, only
board approval is required unless our articles of association provide otherwise.
The transaction must not be adverse to our interest. Furthermore, if the
transaction is an extraordinary transaction, then, in addition to any approval
stipulated by the articles of association, it also must be approved by our audit
committee and then by the board of directors, and, under certain circumstances,
by a meeting of our shareholders. An office holder who has a personal interest
in a matter that is considered at a meeting of the board of directors or the
audit committee may not be present at this meeting or vote on this matter.
The Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in Koor. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and our
shareholders. The shareholder approval must include at least one-third of the
shareholders who have no personal interest in the transaction and are present,
in person or by proxy, at the meeting or, alternatively the total shareholdings
of those who have no personal interest in the transaction who vote against the
transaction must not represent more than one percent of the voting rights in
Koor.
87
In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of our
outstanding share capital (assuming the exercise or conversion of all securities
held by such person that are exercisable for or convertible into shares) or that
will cause any person to become, as a result of the issuance, a holder of more
than five percent of our outstanding share capital, requires approval by the
board of directors and our shareholders.
Certain types of resolutions, called special or extraordinary
resolution, such as resolutions amending a company's articles of association and
regarding changes in capitalization, mergers, consolidations, windings up, or
authorizing a class of shares with special rights, require approval of the
holders of 75% of the shares represented at the meeting and voting thereon.
Under the provisions of the Companies Law, the shareholders of a company may
decide to amend such company's articles of association to reduce the percentage
required for a special resolution to as low as a simple majority or eliminate
the distinction between ordinary and special resolutions completely; such an
amendment must be adopted by a 75% majority.
Under the Companies Law, our shareholders have a duty to act in good
faith towards us and our shareholders and to refrain from abusing his or her
power in Koor including, among other things, while voting in a general meeting
of shareholders on the following matters:
o Any amendment to the articles of association;
o An increase of our authorized share capital;
o A merger; and
o Approval of interested party transactions which require
shareholders approval.
In addition, any controlling shareholder, any shareholder who knows
that it possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's articles of
association, has the power to appoint or prevent the appointment of an office
holder in Koor, is under a duty to act with fairness towards us. The Companies
Law does not describe the substance of this duty.
Insurance, Exemption and Indemnity of Office Holders
Under the Companies Law and pursuant to our articles of association as
amended by a special resolution of the shareholders meeting held on June 1,
2003, we may, from time to time enter into a contract to insure any office
holder including directors, in full or in part, for liability resulting from an
obligation imposed on him or her as a result of an action performed in his or
her capacity as an office holder in Koor, for each of the following:
(1) A breach of a duty of care towards the company or towards another
person.
(2) A breach of a duty of trust towards the company, provided that the
office holder acted in good faith and had reasonable grounds to presume that his
or her action would not harm the interests of the company.
(3) A financial obligation imposed on him in favor of another person.
88
In addition, Under the Companies Law and pursuant to our articles of
association as amended, we may, from time to time, indemnify an office holder,
in full or in part, for an obligation or expense imposed on him or her as a
result of an action performed in his or her capacity as an office holder in
Koor, with respect to: (1) any financial obligation imposed on him or her in
favor of another person pursuant to a judgment, including a judgment given in a
settlement or arbitration decision approved by the court; and (2) any reasonable
litigation expenses, including lawyer's fees requited by the office holder or
imposed on him by a court, in a proceeding submitted against him by Koor or in
its name or by another person, or in a criminal indictment in which he was
acquitted, or a criminal indictment in which he was convicted of an offense not
requiring proof of criminal intent.
We may give an advance undertaking to: (1) indemnify an office holder,
provided that the undertaking is limited to types of events which, in the
opinion of the board of directors, are foreseeable in advance at the time the
undertaking to indemnify is given, and in an amount which the board of directors
has determined is a reasonable amount under the circumstances, on condition that
the amount paid for one set of events shall not exceed 25% of our equity
according to the latest financial statements - annual or quarterly - as
published near the date of payment of the indemnification; and (2) indemnify an
office holder retroactively.
Required Approvals
In addition, under the Companies Law, indemnification of, and
procurement of insurance coverage for, our office holders must be approved by
our audit committee and board of directors and, in specified circumstances, by
our shareholders.
Description of Koor's Deferred Shares
As of June 30, 2006, we had 15,156,533 Deferred Shares, par value NIS
0.001 per share, outstanding. Holders of Deferred Shares are only entitled to
receive the nominal paid-up value of the Deferred Shares in the event of the
winding up of Koor, subject to prior payment of the nominal paid-up value of the
ordinary shares to the holders of ordinary shares. The holders of the Deferred
Shares do not have any voting rights and they are not entitled to participate in
the distribution of dividend of any kind. As of June 30, 2006, one of our
wholly-owned subsidiaries held 13,598,936 (89.7%) of our Deferred Shares.
Description of Koor's Ordinary Shares
The par value of our ordinary shares is NIS 0.001 per share, and all
issued and outstanding ordinary shares are fully paid and non-assessable.
Holders of paid-up ordinary shares are entitled to participate equally in the
payment of dividends and other distributions and, in the event of liquidation,
in all distributions after the discharge of liabilities to creditors. Our
shareholders do not have preferential rights to purchase new shares in Koor.
As of June 30, 2006, one of our wholly-owned subsidiaries held 15,799
of our ordinary shares; however, pursuant to the Companies Law these ordinary
shares do not confer voting rights while held by our subsidiary.
89
Voting is on the basis of one vote per share. An ordinary resolution
(for example, resolutions for the approval of final dividends or the appointment
of auditors) requires the affirmative vote of a majority of shares voting in
person or by proxy. A special resolution (for example, resolutions amending the
articles of association or authorizing changes in capitalization or in the
rights of shareholders) requires the affirmative vote of at least 75% of the
shares voting in person or by proxy.
Under the articles of association, if at anytime the share capital is
divided into various classes, we may, by way of special resolution consented to
in writing by the holders of three quarters of our issued shares or a special
resolution passed at an extraordinary meeting, alter the previous benefits
restrictions and provisions applicable to that class. We shall also be entitled,
by special resolution, to amend our share capitalization.
The Board of Directors has the power to set aside our cash profits to
pay a final dividend after making appropriations for capital reserves; such a
dividend must be approved at a general meeting. No dividend shall be declared at
a general meeting which is greater than that recommended by the Board of
Directors. The Board of Directors is also entitled to pay shareholders an
interim divided if it is justified in light of our financial position. All
ordinary shares represented by ADRs will be issued in registered form only.
Ordinary shares do not entitle their holders to preemptive rights.
Meetings of Shareholders
Under the Companies Law, we are required to hold an annual meeting
every year no later than fifteen months after the previous annual meeting. In
addition, under the Companies Law, we are required to hold a special meeting in
the following circumstances:
o At the direction of the Board of Directors;
o If so requested by two directors or 1/4 of the serving directors;
or
o Upon the request of one or more shareholder who have at least 5%
of the issued share capital and at least 1% of the voting rights
or more shareholders who have at least 5% of the voting rights.
If the Board of Directors receives a demand to convene a special
meeting, it must publicly announce the scheduling of the meeting within 21 days
after the demand is delivered. The meeting must then be held no later than 35
days after notice was made public.
Under the Companies Law, the agenda at an annual meting is determined
by the Board of Directors. The agenda must also include the proposals for which
the convening of a special meeting was called, as well as any proposal requested
by one or more shareholder who holds no less than 1% of the voting rights, as
long as the proposal is one suitable for discussion at an annual meeting.
Under the Companies Law, a notice of an annual meeting must be made
public (and delivered to every shareholder registered in the shareholders
register, unless it is stated otherwise in the articles of the company as it is
with Koor) at least 21 days before the meeting is convened.
90
The shareholders entitled to participate and vote at the meeting are the
shareholders as of the record date set at the time of the decision to convene
the meeting, provided that the record date is not more than 40 days, and not
less than four days, before the date of the meeting.
A quorum is represented by at least two holders of ordinary shares
personally, or by proxy, who together hold at least 1/3 of the voting rights of
Koor. If such quorum is not present, the meeting stands adjourned until the same
day of the following week. At the adjourned meeting, two members, irrespective
of their percentage holding of voting rights, shall constitute a quorum.
Under the Companies Law, a shareholder who intends to vote at a meeting
must demonstrate that he owns shares in accordance with the regulations. Under
these regulations, a shareholder whose shares are registered with a member of a
stock exchange (such as NYSE or the TASE) must provide us with an authorization
from such member regarding his ownership as of the record date.
Right of Non-Israeli Shareholders to Vote
Our memorandum of association, the articles of association, and the
laws of the State of Israel do not restrict in any way the ownership or voting
of our ordinary shares by nonresidents or persons who are not citizens of
Israel, except with respect to citizens or residents of countries that are in a
state of war with Israel.
Change of Control
The Companies Law allows mergers, provided that each party to the
transaction obtains the approval of its board of directors and shareholders. For
purposes of the shareholder vote of each party, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares not held by
the other party (or by any person who holds 25% or more of the shares or the
right to appoint 25% or more of the directors of the other party) have voted
against the merger. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of that party. Finally, a
merger may not be completed unless (i) at least 50 days have passed from the
time that the requisite proposals for approval of the merger have been filed
with the Israeli Registrar of Companies and (ii) 30 days have passed since the
merger was approved by the shareholders of each of the parties.
Provisions of the Companies Law that deal with "arrangements" between a
company and its shareholders may be used to effect squeeze-out transactions in
which the target company becomes a wholly-owned subsidiary of the acquirer.
These provisions generally require that the merger be approved by a majority of
the participating shareholders holding at least 75% of the shares voted on the
matter. In addition to shareholder approval, court approval of the transaction
is required. The Companies Law also provides for a merger between companies,
after completion of the above procedure for an "arrangement" transaction and
court approval of the merger.
91
The Companies Law also provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company, unless
there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser
would become a 45% shareholder of the company, unless there is already a 45%
shareholder of the company. This requirement does not apply if the acquisition
(i) occurs in the context of a private placement by the company that received
shareholder approval, (ii) was from a 25% shareholder of the company and
resulted in the acquirer becoming a 25% shareholder of the company or (iii) was
from a 45% shareholder of the company and resulted in the acquirer becoming a
45% shareholder of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
company's outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
company's outstanding shares will be acquired by the offeror and (ii) the number
of shares tendered in the offer exceeds the number of shares whose holders
objected to the offer. In any event, if as a result of an acquisition of shares
the acquirer will hold more than 90% of a company's shares, the acquisition must
be made by means of a tender offer for all of the shares. If more than 95% of
the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be transferred to it. The law provides for the
appraisal rights if a shareholder files a request in court within three months
of a full tender offer.
Material Contracts
Sales of MA Industries Shares
On January 14, 2004, we entered into an agreement, pursuant to which we
sold 27 million shares of MA Industries to UBS Securities Israel Ltd. for
approximately NIS 418 million.
On February 3, 2005, we entered into a block transfer deed, pursuant to
which we sold 15.9 million shares of MA Industries to Merrill Lynch
International for approximately NIS 374 million. Under the terms of the share
transfer deed, we undertook not to sell additional shares of MA Industries for a
nine-month period from the date of sale. As a result of this sale, and following
the issuance by MA Industries of additional shares in 2005 upon the conversion
of convertible securities and the exercise of employee stock options, our
ownership percentage in MA Industries decreased to 31.5% as of December 31, 2005
(28.6% on a fully diluted basis taking into consideration the exercise of
outstanding stock options and the conversion of outstanding convertible
debentures).
Tadiran Communications Share Purchase Agreement
On September 10, 2004 we entered into a share purchase agreement with
Trefoil Israel Partners II, L.P., First Israel Mezzanine Fund L.P. and First
Israel Mezzanine Fund (in Israel) Limited Partnership to acquire approximately
33% of the shares of Tadiran Communications (approximately 31% on a fully
diluted basis taking into consideration the exercise of outstanding stock
options) from them for approximately NIS 637 million (approximately $144
million). Our
92
acquisition of these shares, which closed in November 2004, was
financed through a loan from an Israeli bank secured by these shares.
Sale of Knafaim Shares
On September 29, 2004, we entered into three share transfer deeds to
sell a total of 19% of the shares of Knafaim to Mr. Israel Borowitz, Ms. Tamar
Borowitz (controlling shareholders of Knafaim) and Mr. Avshalom Nuriel for a
total purchase price of approximately NIS 144 million. As a result of these
sales, our shareholding in Knafaim decreased from approximately 28.3% to
approximately 9.2%.
Koor-Elbit-Federman Transactions
On December 27, 2004, we entered into a series of agreements with Elbit
Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or Federmann. Under
the terms of a share transfer deed with Elbit, we agreed to sell our entire
holdings in Tadiran Communications (approximately 33%) to Elbit for
approximately $146 million. Concurrently, pursuant to a share transfer deed with
Federmann, we agreed to acquire approximately 9.8% of Elbit's share capital from
Federmann for approximately $99 million. In connection with each of these
transactions we entered into a shareholders agreement with the other party
relating to, among other things, the voting of shares in the election of
directors and rights of one party in connection with certain dispositions of
shares by the other party. According to the shareholders' agreement, Federmann
has undertaken to support the appointment and vote for the election of directors
to Elbit's Board who are nominated by us, in a number equal to the greater of:
(a) two directors or (b) 20% of the number of Elbit's directors, and we have
undertaken to vote for the election of all the candidates nominated by Federmann
for the offices of the other directors of Elbit. We announced that as long as we
hold Elbit shares we will not invoke our right to appoint 20% of Elbit's
directors. Furthermore, we have undertaken to vote, in every matter and proposed
resolution submitted for approval to a general shareholders' meeting of Elbit's
shareholders, in accordance with instructions given to us by Federmann, subject
to certain exceptions.
The two sales were interconnected and would be completed in two stages,
the first of which closed on April 18, 2005. For a more detailed description of
these transactions, see "Item 4 - Information on the Company - Business Overview
- Our Defense Electronics Business - Recent Developments."
On July 6, 2005 we signed an amendment to these agreements, pursuant to
which we would sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we would sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale would be conducted in
two parts, and we and Elbit would share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications was contingent on the execution of
our sale of our holdings in Elisra to Elbit. Elbit's acquisition of Elisra was
subject to the approvals of Elbit's
93
shareholders at general meeting to be held within sixty days and Israel's
Anti-Trust Commissioner. In addition, under the amended terms of the
transactions, contrary to the terms of the original agreement, we would acquire
only an additional 2.45% of Elbit from Federmann for $25 million, regardless of
whether the sale of Elisra is approved by the Israeli Anti-Trust Commissioner.
Following the completion of all the stages of these transactions, we hold
approximately 7.7% of Elbit.
The transaction closed on November 30, 2005.
Exchange Controls
Holders of ADSs are able to convert dividends and liquidation
distributions into freely repairable non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation, pursuant to a general permit
issued by the Controller of Foreign Exchange at the Bank of Israel, or
Controller, under the Currency Control Law, 1978, or Currency Control Law, as
modified by certain reforms in May 1998, provided that Israeli income tax has
been withheld by us with respect to such amounts.
Our ADSs may be freely held and traded pursuant to the General Permit
and the Currency Control Law. The ownership or voting of ADSs by non-residents
of Israel, except with respect to citizens of countries that are in a state of
war with Israel, are not restricted in any way by our memorandum of association
or articles of association or by the laws of the State of Israel.
Pursuant to the reforms, the Bank of Israel has issued a new "general
permit." Under such general permit, foreign currency transactions are generally
permitted, except for transactions described in the permit that are specifically
restricted. Among these restricted transactions are foreign currency
transactions by institutional investors, including investments outside of Israel
by pension funds and insurers, as well as futures contracts by foreign residents
for periods of more than one month. All foreign currency transactions must be
reported to the Bank of Israel under the new general permit.
Certain changes in Israeli tax legislation are expected as a result of
the reforms. No assurance can be given that such legislative changes will be
forthcoming in any particular time frame, or at all.
Taxation
The following is a discussion of Israeli and United States tax
consequences material to our United States shareholders. The discussion is not
intended, and should not be construed, as legal or professional tax advice and
does not exhaust all possible tax considerations.
Holders of our ADSs should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of our ADSs, including, in particular, the effect of any foreign,
state or local taxes.
94
Israeli Tax Considerations
The following discussion describes the current corporate tax structure
applicable to companies in Israel, as well as a summary of certain Israeli tax
laws affecting U.S. and other non-Israeli shareholders, for general information
only and is not intended to substitute for careful or specific tax planning. To
the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed
herein will accord with any such interpretation in the future. This discussion
is not intended, and should not be construed, as legal or professional tax
advice, and does not cover all possible tax considerations. Each investor should
consult his or her own tax advisor as to the particular tax consequences of an
investment in the ordinary shares including the effects of applicable Israeli or
foreign or other tax laws and possible changes in the tax laws.
General Corporate Tax Structure
Israeli companies are generally subject to corporate tax on taxable
income at the rate of 34% for the 2005 tax year, 31% for the 2006 tax year, 29%
for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and
25% for the 2010 tax year and thereafter and are subject to capital gains tax at
a rate of 25% for real capital gains (other than gains deriving from the sale of
listed securities) derived after January 1, 2003. For capital gains derived from
assets acquired prior to January 1, 2003, the tax rate will be proportionate,
based upon the corresponding periods. See also Item 3- "Risks Related to Israel"
for a discussion of tax benefits under the Encouragement of Capital Investments
Law.
Special Provisions Relating to Taxation under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, which we refer to
in this annual report as the "Inflationary Adjustments Law", represents an
attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is complex.
Among other features, there is a special tax adjustment for the preservation of
equity as follows:
Where a company's equity exceeds the depreciated cost of fixed
assets, as calculated under the Inflationary Adjustments Law, a deduction from
taxable income is permitted equal to the excess multiplied by the applicable
annual rate of inflation. The maximum deduction permitted in any single tax year
is 70% of taxable income, with the unused portion permitted to be carried
forward, linked to the increase in the Israeli Consumer Price Index, or CPI;
Where a company's depreciated cost of fixed assets exceeds its
equity, then the excess multiplied by the applicable annual rate of inflation is
added to taxable income;
Subject to specified limitations, depreciation deductions on
fixed assets and losses carried forward are adjusted for inflation based on the
increase in the CPI.
Furthermore, capital gains and losses from the sale of fixed
assets and securities are calculated on a real basis.
95
Recent Israeli Tax Reforms
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 2002, known as the Tax Reform, came into effect, which
significantly changed the taxation basis of corporate and individual taxpayers
from a territorial basis to a worldwide basis.
The Tax Reform is aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income.
In January 2006, the Law for Amendment of the Income tax Ordinance
(Amendment No. 147), known as Amendment 147, came into effect. The main purpose
of the Amendment is to continue the trend of reducing the corporate tax rate and
the rate of salary taxes, and to unify and simplify the taxation of capital
income.
The Tax Reform and Amendment 147, introduced the following, among other
things:
o Reduction of the tax rate levied on real capital gains (other
than gains deriving from the sale of listed securities) derived
after January 1, 2003, to a general rate of 25% for corporations.
However, capital gains derived by corporations that are subject
to the provisions of the Inflationary Adjustments Law or the
provisions of Article 130a of the Income Tax Ordinance, will be
subject to ordinary tax rates.
o Reduction to 20% of the tax rate applicable to real capital gains
derived by individuals as of January 1, 2003. Nevertheless, real
capital gains from the sale of securities by individuals will be
taxed at 25% if the individual is a significant shareholder in an
entity whose shares are sold on the same date, or in the
preceding twelve months, or if the individual is claiming
deduction of financing expenses from the capital gain on the sale
of the securities. The term "significant shareholder" is defined
as one who holds, directly or indirectly, 10% or more of the
voting power in the entity whose securities are being sold.
o In general, regarding assets acquired prior to January 1, 2003,
the reduced tax rate will apply to a proportionate part of the
gain, in accordance with the holding periods of the asset, before
or after January 1, 2003, on a linear basis;
o Imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial
source of income, including income derived from passive sources
such as interest, dividends and royalties;
o Introduction of controlled foreign corporation rules into the
Israeli tax structure. Generally, under such rules, an Israeli
resident who holds, directly or indirectly, 10% or more of the
rights in a foreign corporation which has 70% or more of its
shares not publicly traded, and in which more than 50% of the
rights are held directly or indirectly by Israeli residents, and
a majority of whose income in a tax year is considered passive
income, will be liable for tax on the portion of such income
attributed to his holdings in such corporation, as if such income
were distributed to him as a dividend, provided that the tax
imposed by the foreign country on the passive income is equal to
or less than 20%;
96
o Imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003, from the sale of shares of
publicly traded companies (such gain was previously exempt from
capital gains tax in Israel). For information with respect to the
applicability of Israeli capital gains taxes on the sale of
ordinary shares, see "Capital Gains and Income Taxes Applicable
to Non-Israeli Shareholders" below; and
o Introduction of a new regime for the taxation of shares and
options issued to employees and officers (including directors).
Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares of publicly traded Israeli companies , and
are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange
outside of Israel in a country with which Israel has a tax treaty, such as the
NYSE, provided however that such capital gains are not derived from a permanent
establishment in Israel and provided that such shareholders did not acquire
their shares prior to an initial public offering, unless the holder is subject
to the Inflationary Adjustments Law. However, non-Israeli corporations will not
be entitled to the exemption with respect to gains derived from the sale of
shares of Israeli companies publicly traded, if an Israeli resident (i) has a
controlling interest of 25% or more in such non-Israeli corporation, or (ii) is
the beneficiary or is entitled to 25% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly.
Under the convention between the United States and Israel concerning
taxes on income (See "U.S.-Israel Tax Treaty" below), Israeli capital gains tax
will not apply to the sale, exchange or disposition of ordinary shares by a
person who qualifies as a resident of the United States (within the meaning of
the U.S.-Israel tax treaty) and is entitled to claim the benefits available to
the person by such treaty, except under certain circumstances, when a US
resident holds 10% or more of an Israeli entity, and the US resident is not
eligible for tax exemption according to the Israeli law, as described below.
In the event that the conditions for tax exemption described above are
not met, or if capital gains are not tax exempt according to the tax treaty
between Israel and the shareholder's country of residence, the following shall
apply:
Israeli law generally imposes a capital gains tax on the sale of
capital assets located in Israel including shares in Israeli companies by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder's country if residence
provides otherwise. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is a portion of the total capital gain that is
equivalent to the increase of the relevant asset's purchase price that is
attributable to the increase in the Israeli consumer price index (or, in certain
cases, to the increase in the currency in which they purchased shares) between
the date of purchase and the date of sale. The real gain is the excess of the
total capital gain over the inflationary surplus.
97
Pursuant to the Amendment 147, generally, real capital gains derived
after January 1, 2003 from the sale of shares are subject to a capital tax rate
of 20% if derived by individuals, and a 25% tax rate if derived by corporations.
The abovementioned tax rate does not apply to (1) dealers in securities who are
subject to ordinary tax rates (i.e. corporate tax rates for corporations and
marginal tax rates for individuals) regarding income derived from the sale of
shares; (2) corporations that report in accordance with the Inflationary
Adjustments Law or in accordance with Article 130a of the Income Tax Ordinance
that are subject to ordinary corporate tax rates on capital gains derived from
the sale of marketable securities; shareholders who acquired their shares prior
to an initial public offering (that are subject to a different tax arrangement);
(4) individuals that are significant shareholders in the corporation whose
shares are being sold at the date of the sale or during the preceding twelve
month period. Such shareholders will be subject to a 25% tax rate on capital
gains from the disposal of their shares; and (5) individuals who deduct
financing expenses for tax purposes from their gains from the disposal of
securities, who will be subject to a 25% tax rate until regulations will be
published by the Ministry of Finance, limiting the deduction of financing
expenses against capital gains from disposal of securities.
In the case of taxpayers that are no subject to the provisions of the
Inflationary Adjustments Law, the tax basis of shares acquired prior to January
1, 2003 will be determined in accordance with the average closing share price in
the three trading days preceding January 1, 2003. However, in some cases, the
actual adjusted cost of the shares will be considered as the tax basis if it is
higher than such average price. In such cases, the capital loss accrued by the
taxpayer amounting to the decrease in the value of the share from the purchase
date until January 1, 2003 will not be recognized for tax purposes.
Generally, in some instances where our foreign shareholders may be
liable to Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.
However, if the shares are held through an Israeli financial institution and the
foreign resident has filed the proper forms., there will be no withholding tax
deduction.
Non residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest paid by an Israeli resident, and non
passive income if the services were rendered in Israel or if a business is
operated in Israel. On distributions of dividends by us other than bonus shares
(stock dividends), income tax at the rate of 20% (15% in the case of dividend
distributed from the earnings of an approved enterprise) is generally withheld
at source, unless a different rate is provided in a treaty between Israel and
the shareholder's country of residence.
However, a foreign resident who is a significant shareholder is liable
for 25% tax on dividends paid by an Israeli corporation, that are not derived
from the earnings of an approved enterprise. As a result, the foreign resident
may be required to file a tax return in Israel and pay the tax.
U.S.-Israel Tax Treaty
Pursuant to the Convention Between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended (the "U.S.-Israel
98
Tax Treaty"), which became effective as of January 1, 1995, the sale, exchange
or disposition of ADSs or ordinary shares by a person who qualifies as a
resident of the United States within the meaning of the U.S.-Israel Tax Treaty
and who is entitled to claim the benefits afforded to such resident by the
U.S.-Israel Tax Treaty ("Treaty U.S. Resident") will generally not be subject
to Israeli capital gains tax unless such Treaty U.S. Resident held, directly or
indirectly, shares representing 10% or more of our voting power during any part
of the 12-month period preceding such sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of ADSs or ordinary shares
by a Treaty U.S. Resident who held, directly or indirectly, shares representing
10% or more of our voting power at any time during such preceding 12-month
period would be subject to such Israeli tax, to the extent applicable; however,
under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted
to claim a credit for such taxes against the U.S. Federal income tax imposed
with respect to such sale, exchange or disposition, subject to the limitations
in U.S. laws applicable to foreign tax credits. On distributions of dividends
other than bonus shares or stock dividends, income tax is generally withheld at
the source at the rate of 20%, or 15% for dividends of income generated by an
approved enterprise, unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence.
Under the U.S.-Israel tax treaty, the maximum Israeli tax on dividends
paid to a holder of ordinary shares who is a U.S. resident (as defined in the
treaty) is 25% and if such shareholder is a U.S. corporation holding at least
10% of our issued voting power during the part of the tax year which precedes
the date the dividend is distributed as well as throughout the previous tax year
and the company distributing the dividend in not an "investment company" as
defined in the tax treaty, the maximum Israeli tax on dividends paid to such
corporation is 12.5%, or 15% for dividends derived from income generated from an
approved enterprise.
U.S. Federal Income Tax Considerations
The following is a summary of the material U.S. Federal income tax
consequences of the purchase, ownership and disposition of our ADSs to U.S.
Holders. This summary is based on U.S. Federal income tax laws, regulations,
rulings and decisions in effect as of the date of this annual report, all of
which are subject to change at any time, possibly with retroactive effect. This
summary does not address all tax considerations that may be may be relevant to
any particular U.S. holder in light of the holder's individual circumstances.
In particular, this summary does not address the potential application of the
alternative minimum tax or the U.S. federal income tax consequences to U.S.
holders that are subject to special treatment, including U.S. holders that:
o Are broker-dealers or insurance companies;
o Are financial institutions or financial services entities;
o Are tax-exempt organizations or retirement plans;
o Own directly, indirectly or by attribution 10% or more of our
voting shares;
o Hold ADSs as part of a straddle or a hedging or conversion
transaction;
99
o Hold their ADSs through partnerships or other pass through
entities;
o Have elected mark-to-market accounting; and
o Have a functional currency that is not the dollar.
This summary does not address the effect of any U.S. Federal taxation
other than U.S. Federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and
United States Federal, state and local tax considerations of purchasing, holding
or disposing of our ADSs.
For purposes of this summary, a U.S. Holder is:
o An individual who is a citizen or, for U.S. Federal income tax
purposes, a resident of the United States;
o A corporation (or other entity taxable as a corporation) created
or organized in or under the laws of the United States or any
political subdivision thereof;
o An estate whose income is subject to U.S. Federal income tax
regardless of its source; or
o A trust if:
(a) a court within the United States is able to exercise primary
supervision over administration of the trust; and
(b) one or more United States persons have the authority to
control all substantial decisions of the trust.
Taxation of Dividends
Subject to the discussion below under "Passive Foreign Investment
Companies," the gross amount of any distributions that you receive with respect
to ADSs, including the amount of any Israeli taxes withheld from these
distributions, will constitute dividends for U.S. Federal income tax purposes,
to the extent the distribution is paid out of our current or accumulated
earnings and profits, as determined for U.S. Federal income tax principles. You
will be required to include this amount of dividends in gross income as ordinary
income on the date such dividend is actually or constructively received.
Distributions in excess of our earnings and profits will be treated as a
non-taxable return of capital to the extent of your tax basis in the ADSs and,
to the extent in excess of your tax basis, will be treated as capital gain. See
"--Dispositions of ADSs" below for the discussion on the taxation of capital
gains. Dividends generally will not qualify for the dividends-received deduction
available to corporations.
Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld from these dividends, will be includible as income to you in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
such dividends are distributed. If you convert
100
dividends paid in NIS into U.S. Dollars on the day the dividends are
distributed, you generally should not be required to recognize foreign currency
gain or loss with respect to such conversion. Any gain or loss resulting from a
subsequent exchange of such NIS generally will be treated as U.S. source
ordinary income or loss.
Further, and subject to the discussion below under "Passive Foreign
Investment Companies," noncorporate U.S. Holders may be eligible for reduced
rates of U.S. federal income tax (currently a maximum federal tax rate of 15%)
in respect of dividends received with respect to ADSs in taxable years beginning
before January 1, 2011, provided the holders satisfy certain holding period
requirements. Please note that certain restrictions apply to the ability of an
individual U.S. Holder to benefit from the lower rates. For example, the lower
rates are only available to such an individual if such individual (i) holds
stock for more than 60 days during the 121-day period beginning on the date that
is 60 days before the date on which the share becomes ex-dividend (disregarding
any period during which the U.S. Holder has diminished the risk of loss with
respect to such stock (for example, by holding an option to sell such stock)),
and (ii) is not under an obligation to make related payments with respect to
positions in substantially similar or related property. Subject to certain
conditions and limitations, you may elect to claim a credit against your U.S.
Federal income tax liability for Israeli tax withheld from dividends received in
respect of the ADSs. Dividends generally will be treated as foreign-source
passive income or financial services income for United States foreign tax credit
purposes. The rules relating to the determination of the foreign tax credit are
complex, and you should consult your personal tax advisors to determine whether
and to what extent you would be entitled to this credit. Alternatively, you may
elect to claim a U.S. tax deduction, instead of a foreign tax credit, for such
Israeli tax, but only for a year in which you elect to do so with respect to all
foreign income taxes.
Dispositions of ADSs
If you sell or otherwise dispose of your ADSs, you will recognize gain
or loss for U.S. Federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and your
adjusted tax basis in your ADSs. Subject to the discussion below under the
heading "Passive Foreign Investment Companies,"' such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
had held the ADSs for more than one year at the time of the sale or other
disposition. Long-term capital gains realized by individual U.S. Holders
generally are subject to a lower marginal U.S. federal income tax rate than
ordinary income. Under most circumstances, any gain that you recognize on the
sale or other disposition of ADSs will be U.S.-source for purposes of the
foreign tax credit limitation; and losses recognized will be allocated against
U.S. source income.
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company, or PFIC, if in any taxable year either 75% or more
of our gross income is passive income, or at least 50% of the average value of
all of our assets for the taxable year produce or are held for the production of
passive income. For this purpose, passive income generally includes dividends,
interest, royalties, rents, annuities and the excess of gains over losses from
the disposition of assets which produce passive income. If we were determined to
101
be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply
to U.S. Holders owning ADSs. Accordingly, you are urged to consult your tax
advisors regarding the application of such rules.
If we are treated as a PFIC for any taxable year,
o you would be required to allocate income recognized upon
receiving certain dividends or gain recognized upon the
disposition of ADSs ratably over your holding period for such
ADSs,
o the amount allocated to the current taxable year, and any taxable
year prior to the first taxable year in which we were a PFIC,
would be taxed as ordinary income and would not be "qualified
dividend income,"
o the amount allocated to each of the other taxable years would be
subject to tax at the highest individual or corporate tax rate,
as the case may be, and an interest charge would be imposed with
respect to the resulting tax liability allocated to each such
year,
o noncorporate holders will not be eligible for the reduced rate on
dividends received with respect to ADSs and
o you would be required to make an annual return on IRS Form 8621
regarding distributions received with respect to ADSs and any
gain realized on your ADSs.
One method to avoid the aforementioned treatment is to make a timely
mark-to-market election in respect of your ADSs. If you elect to mark-to-market
your ADSs, you will generally include in income any excess of the fair market
value of the ADSs at the close of each tax year over your adjusted basis in the
ADSs. If the fair market value of the ADSs had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ADSs over its fair market value at that time. However,
such deductions generally would be limited to the net mark-to-market gains, if
any, that you included in income with respect to ADSs in prior years. Income
recognized and deductions allowed under the mark-to-market provisions, as well
as any gain or loss on the disposition of ADSs with respect to which the
mark-to-market election is made, is treated as ordinary income or loss.
Based on our income, assets and activities for the year 2005, we
believe that we were not a PFIC for that year, and we do not expect to become a
PFIC in the foreseeable future. However, there can be no assurances that we will
not be treated as a PFIC for that year or any taxable year. If we are or become
a PFIC for any taxable year included in your holding period, we generally will
remain a PFIC for all subsequent taxable years with respect to your holding of
our ADSs.
You are urged to consult your tax advisor regarding the possibility of
us being classified as a PFIC and the potential tax consequences arising from
the ownership and disposition (directly or indirectly) of an interest in a PFIC.
102
Backup Withholding and Information Reporting
Dividend payments made with respect to ADSs and proceeds received in
connection with the sale or other disposition of ADSs may be subject to
information reporting to the U.S. Internal Revenue Service (the "IRS") and
backup withholding. Backup withholding will not apply, however, if a U.S. Holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates such fact or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable backup withholding rules. Persons required to
establish their exempt status generally must provide such certification on IRS
Form W-9 or Form W-8BEN (as applicable). Amounts held as backup withholding may
be credited against a U.S. Holder's U.S. federal income tax liability, and a
U.S. Holder may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS and
furnishing any required information.
Documents on Display
We are subject to certain of the information reporting requirements of
the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We,
as a "foreign private issuer" are exempt from the rules and regulations under
the Exchange Act prescribing the furnishing and content of proxy statements, and
our officers, directors and principal shareholders are exempt from the reporting
and "short-swing" profit recovery provisions contained in Section 16 of the
Exchange Act, with respect to their purchase and sale of our shares. In
addition, we are not required to file reports and financial statements with the
U.S. Securities and Exchange Commission, or SEC, as frequently or as promptly as
U.S. companies whose securities are registered under the Exchange Act. However,
we will file with the SEC an annual report on Form 20-F containing financial
statements audited by an independent accounting firm. We will also furnish
quarterly reports on Form 6-K containing unaudited financial information after
the end of each of the first three quarters.
You may read and copy any document we file with the SEC at its public
reference facilities at, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of this web site is
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
General
Our market risk represents the risk of changes in the value of
financial instruments caused by fluctuations in foreign exchange rates, interest
rates and equity prices. From time to time, we enter into hedging arrangements
to reduce our overall exposure to market risk; however, as a matter of policy,
we do not enter into transactions of a speculative or trading nature. Foreign
currency exchange rate and interest rate exposures are monitored by tracking
103
actual and projected commitments and through the use of sensitivity analysis. We
do not believe that we are exposed to any material market risk with regard to
market risk sensitive instruments.
Market risk related to foreign currency exchange rates
We have financial liabilities denominated in various currencies
(primarily dollars). Fluctuations in foreign currency exchange rates are likely
to affect our financing expenses.
As of December 31, 2005, we had consolidated foreign currency-linked
financial liabilities of approximately NIS 345 million, all of which was
dollar-linked.
As of December 31, 2005, our net financial liabilities in foreign
currency totaled approximately NIS 35 million, all of which was dollar-linked.
Should the US dollar exchange rate rise by 2%, our financing expenses would
increase by approximately NIS 0.7 million.
A portion of the currency exposure is derived from the export sales
included in our consolidated financial statements. For the year ended December
31, 2005, those export sales amounted to approximately NIS 672 million,
representing approximately 68% of our total consolidated revenues from sales and
services for that period, while the portion of the expenses included in the
consolidated financial statements that is derived in shekels exceeds 50%.
Our policy regarding hedging against exposure to fluctuations in
currency prices is that each subsidiary will hedge according to the needs and
markets in which it operates; there is no policy of engaging in currency hedging
over the entire consolidated balance sheet.
Our consolidated statements as of December 31, 2005 include
transactions with financial instruments that serve mainly as a hedge against
foreign currency exchange rate exposure for our subsidiary companies.
During 2005, we bought and sold dollars in exchange for other
currencies in forward contracts, call options, put options and swaps. As of
December 31, 2005 there were no open foreign exchange transactions. For a
detailed description of transactions with financial instruments, see Note 21 to
our consolidated financial statements included elsewhere in this annual report.
Market risk related to inflation rates
Some of our financial loans are linked to the Israeli Consumer Price
Index, or CPI. In accordance with Israeli GAAP, until December 31, 2003 our
financial statements were presented in terms of NIS of identical purchasing
power as of December 31, 2003 to account for the effects of inflation based upon
changes in the CPI. As a result, the CPI linkage component of our financing
expenses was neutralized. Subsequent to the discontinuation of the adjustment of
financial statements for inflation as of January 1, 2004, our financing expenses
are now exposed to fluctuations in the CPI.
As of December 31, 2005, our consolidated balance sheet contained
CPI-linked loans and other liabilities totaling approximately NIS 1,797 million.
As of such date, our consolidated balance sheets contained CPI-linked financial
assets totaling approximately NIS 217 million.
104
Our net financial liabilities exposed to CPI-linkage amounted to
approximately NIS 1,580 million as of December 31, 2005. Should the CPI rise by
2%, our financing expenses would increase by approximately NIS 32 million.
We believe that a 2% increase in the CPI constitutes a reasonable
increase for examining the impact of exposure to interest rates on our financing
expenses, in view of the changes that have occurred in recent years and those
that are forecast for the coming year.
We have entered into forward transactions at the parent company level,
in order to reduce the overall exposure to our CPI-linked debt. As at December
31, 2005, we had open CPI-NIS forward contracts for an aggregate notional amount
of NIS 200 million. For a detailed description of transactions with financial
instruments, see Note 21 to our consolidated financial statements included
elsewhere in this annual report.
Market risk related to interest rates
Some of our financial loans are denominated in variable interest rates
that are likely to fluctuate from time to time. Our policy regarding exposure to
interest rates is that each company in our consolidated group manages its own
exposure.
We engage in hedge transactions against interest rate fluctuations from
time to time. As of December 31, 2005, these transactions totaled approximately
NIS 230 million at the parent company level.
As of December 31, 2005, our consolidated balance sheet contained loans
and other liabilities in foreign currencies (in U.S. dollars) totaling
approximately NIS 345 million, and non-index linked shekel-denominated loans
totaling approximately NIS 401 million. As of such date, our consolidated
balance sheets contained financial assets in foreign currencies (in U.S.
dollars) totaling approximately NIS 310 million and non-index linked
shekel-denominated assets totaling approximately NIS 468 million.
As of December 31, 2005, our net financial liabilities exposed to
fluctuations in the LIBOR interest rate amounted to approximately NIS 220
million. Should the LIBOR interest rate rise by 1%, our financing expenses would
increase by approximately NIS 2 million.
As of December 31, 2005, our net financial liabilities exposed to
fluctuations in the interest rate in Israel are approximately NIS 233 million.
Should the interest rate in Israel rise by 2%, our financing expenses would
increase by approximately NIS 5 million.
We believe that a 1% increase in the LIBOR interest rate and 2% in the
interest rate in Israel constitutes a reasonable increase for examining the
impact of exposure to interest rates on our financing expenses, in view of the
changes that have occurred in recent years and those that are forecast for the
coming year.
Market risk related to equity prices
We had equity marketable short-term securities at December 31, 2005 of
approximately NIS 489 million. Market risk was estimated as the potential
hypothetical decrease of 10% in the
105
prices of these securities. Assuming such a decrease, the fair value of the
equity marketable securities would decrease by approximately NIS 49 million.
In addition, we have long-term equity holdings in several subsidiaries
whose securities are traded on the Tel Aviv Stock Exchange and NASDAQ. Ordinary
fluctuations in the prices of these subsidiaries' securities would not affect
our financial statements; however, significant fluctuations may have an adverse
affect on our financial statements.
Item 12. Description of Securities Other than Equity Securities.
------------------------------------------------------
Not Applicable.
106
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
-----------------------------------------------
Not Applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use
of Proceeds.
----------------------------------------------------------------
Not Applicable.
Item 15. Controls and Procedures.
-----------------------
Disclosure Controls and Procedures. Our Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act as of December 31, 2005. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to us (including our consolidated subsidiaries)
required to be included in our reports filed or submitted under the Exchange
Act, and that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
Internal Control Over Financial Reporting. There were no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) that occurred during the year ended December
31, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert.
--------------------------------
Our board of directors has determined that Mrs. Paulette Eitan, an
external director and a member of the audit committee of our board of directors,
is an "audit committee financial expert" as defined in Item 16A of Form 20-F.
Item 16B. Code of Ethics.
--------------
We have adopted a written code of ethics that applies to our Chief
Executive Officer, our Chief Financial Officer and all of our other executive
officers.
You may request a copy of our code of ethics, at no cost, by writing to
or telephoning us as follows:
Koor Industries Ltd.
Telrad Building
14 Hamelacha Street
Park Afek
Rosh Ha'ayin 48091, Israel
Attn: Shlomo Heller, General Counsel
Telephone: +011-972-3-900-8333
107
Item 16C. Principal Accountant Fees and Services.
--------------------------------------
Audit Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $602,000 for fiscal year 2005 in
connection with the professional services rendered for the audit of our annual
consolidated financial statements and our consolidated subsidiaries' annual
financial statements, review of our statutory quarterly consolidated financial
statements and services normally provided by them relating to statutory and
regulatory filings or engagements, including review of documents filed with the
SEC. For fiscal year 2004, KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $2,436,000 for these
services.
Audit-Related Fees: KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $ 14,000 in fiscal year
2005 for assurance and related services reasonably related to the performance of
our audit. In fiscal year 2004, KPMG and its affiliates charged us and our
consolidated subsidiaries an aggregate of approximately $148,000 for
audit-related services. These fees relate mainly to the issuance of special
reports.
Tax Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $ 77,000 in fiscal year 2005 mainly
for tax compliance. KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $124,000 for tax-related services in
fiscal year 2004.
All Other Fees: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $ 211,000 in fiscal year 2005 for
products and services other than those comprising audit fees, audit-related fees
and tax fees. These fees mainly relate to assistance to the companies regarding
documentation of internal control over financial reporting. In fiscal year 2004,
KPMG and its affiliates charged us and our consolidated subsidiaries an
aggregate of approximately $271,000 for products and services in this category.
Audit Committee Pre-Approval Policy and Procedures
Our audit committee is responsible, among other things, for
recommending to our shareholders the appointment of our external auditors, for
approval of the amounts to be paid to our external auditors and for assisting
our board of directors in overseeing the work of our external auditors. To
assure compliance with independence requirements applicable to our independent
auditors, our audit committee pre-approves annually a catalog of specific audit
and non-audit services in the categories Audit Services, Audit-Related Services,
Tax-Related Services, and Other Services that may be performed by our auditors,
as well as the budgeted fee levels for each of these categories. All other
permitted services must receive a specific approval from our audit committee.
Our external auditor periodically provides a report to our audit committee in
order for our audit committee to review the services that our external auditor
is providing, as well as the status and cost of those services.
108
During 2005, none of the services provided to us by our external
auditors were provided pursuant to the de minimis exception to the pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
----------------------------------------------------------
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
-----------------------------------------------------------
None.
109
PART III
Item 17. Financial Statements.
--------------------
See pages F-1 through F-141, incorporated herein by reference.
Item 18. Financial Statements.
--------------------
Not Applicable.
Item 19. Exhibits.
--------
Exhibit No. Description
----------- -----------
1.1 Memorandum of Association of Koor Industries Ltd.*
1.2 Articles of Association of Koor Industries Ltd.*
1.3 Amendments to Articles of Association of Koor Industries
Ltd. Pursuant to a General Meeting of Shareholders held on
June 1, 2003.***
2.1 Form of Ordinary Share Certificate.*
2.2 Form of Deposit Agreement including Form of American
Depositary Receipt.**
4.1 Agreement, dated January 14, 2004, between Koor Industries
Ltd. and UBS Securities Israel Ltd. ****
4.2 Share Purchase Agreement, dated September 10, 2004,
between Koor Industries Ltd. and Trefoil Israel Partners
II, L.P., First Israel Mezzanine Fund L.P. and First
Israel Mezzanine Fund (in Israel) Limited Partnership ****
4.3 Share Transfer Deed, dated September 29, 2004, between
Koor Industries Ltd. and Mr. Israel Borowitz. ****
4.4 Share Transfer Deed, dated September 29, 2004, between
Koor Industries Ltd. and Ms. Tamar Borowitz. ****
4.5 Share Transfer Deed, dated September 29, 2004, between
Koor Industries Ltd. and Mr. Avshalom Nuriel. ****
4.6 Share Transfer Deed, dated December 27, 2004, and amended
July 6, 2005, between Koor Industries Ltd. and Elbit
Systems Ltd. ****
4.7 Shareholders' Agreement, dated December 27, 2004, and
amended July 6, 2005, between Koor Industries Ltd. and
Elbit Systems Ltd. ****
4.8 Share Transfer Deed, dated December 27, 2004, and amended
July 6, 2005, between Koor Industries Ltd. and Federmann
Enterprises Ltd. ****
4.9 Shareholders' Agreement, dated December 27, 2004, and
amended July 6, 2005, among Koor Industries Ltd.,
Federmann Enterprises Ltd. and Heris Aktiengesellschaft.
****
4.10 Share Transfer Deed, dated February 3, 2005, between Koor
Industries Ltd. and Merrill Lynch International. ****
8.1 List of significant subsidiaries and affiliates.*****
12.1 Certification of the Principal Executive Officer of Koor
Industries Ltd. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*****
12.2 Certification of the Principal Financial Officer of Koor
Industries Ltd. pursuant to
110
Section 302 of the Sarbanes-Oxley Act of 2002.*****
13.1 Certification of the Principal Executive and Financial
Officers of Koor Industries Ltd. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*****
14.1 Consent of KPMG Somekh Chaikin to the incorporation by
reference into the effective registration statement on
Form S-8 of Koor Industries Ltd. under the Securities Act
of 1933 of their report with respect to the consolidated
financial statements of Koor Industries Ltd., which
appears in this Annual Report on Form 20-F.*****
_____________________
* Incorporated herein by reference to Koor Industries Ltd.'s
Registration Statement on Form F-1 (Registration No. 333-97732)
filed with the Securities and Exchange Commission on October 3, 1995.
** Incorporated herein by reference to Koor Industries Ltd.'s
Registration Statement on Form F-6 (Registration No. 333-97758)
filed with the Securities and Exchange Commission on October 4, 1995.
*** Incorporated by reference to Koor Industries Ltd.'s Annual Report on
Form 20-F for the year ended December 31, 2002 filed with the
Securities and Exchange Commission on July 15, 2003.
**** Incorporated by reference to Koor Industries Ltd.'s Annual Report on
Form 20-F for the year ended December 31, 2004 filed with the
Securities and Exchange Commission on July 15, 2005.
***** Filed herewith.
111
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rosh
Ha'ayin, State of Israel, on the 10th day of July, 2006.
KOOR INDUSTRIES LTD.
By: /s/ Jonathan B. Kolber
---------------------------
Jonathan B. Kolber
Chief Executive Officer
Koor Industries Ltd. (an Israeli Corporation)
-------------------------------------------------------------------------------
Financial Statements as at December 31, 2005
Contents
Page
----
Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets F-3
Company Balance Sheets F-5
Consolidated Statements of Operations F-7
Company Statements of Operations F-8
Statement of Shareholders' Equity F-9
Consolidated Statements of Cash Flows F-11
Company Statements of Cash Flows F-17
Notes to the Financial Statements F-19
F-1
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
Report of Independent Registered Public Accounting Firm
The Shareholders
Koor Industries Ltd.
We have audited the accompanying balance sheets of Koor Industries Ltd. (the
"Company" or "Koor") and the consolidated balance sheets of the Company and its
subsidiaries (the "Group") as at December 31, 2005 and 2004, and the related
statements of operations, shareholders' equity and cash flows, for each of the
years in the three-year period ended December 31, 2005. These financial
statements are the responsibility of the Group's Board of Directors and of its
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method. The financial
statements of these subsidiaries reflect total assets constituting 13% and 12%
of the total consolidated assets as at December 31, 2005 and 2004 respectively,
and total revenues constituting 13%, 9% and 13% of the total continuing
consolidated revenues and 46%, 40% and 46% of the total discontinuing
consolidated revenues for the years ended December 31, 2005, 2004 and 2003,
respectively. Furthermore, we did not audit the financial statements of certain
affiliates, whose company's investments constitute NIS 66,107 thousand and NIS
232,190 thousand, as at December 31, 2005 and 2004, respectively, and its equity
in earnings (losses) constitute NIS (5,469) thousand, NIS 7,336 thousand and NIS
(12,875) thousand for the years ended December 31, 2005, 2004 and 2003,
respectively. The financial statements of those subsidiaries and affiliates were
audited by other auditors whose reports thereon were furnished to us, and our
opinion, insofar as it relates to amounts included for such subsidiaries and
affiliates, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits, and reports of the other auditors, provide a reasonable basis for our
opinion.
In our opinion, based on our audits and on the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Company and the consolidated financial position of
the Group as of December 31, 2005 and 2004 and the results of their operations,
the changes in shareholders' equity and their cash flows for each of the years,
in the three-years ended December 31, 2005, in conformity with accounting
principles generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 29 of the financial statement.
As explained in Note 2(B), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements as of and for the year ended December 31, 2003
are stated in values that were adjusted to that date according to the changes in
the general purchasing power of the Israeli currency, in accordance with
opinions of the Institute of Certified Public Accountants in Israel.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
March 21, 2006, except for Note 29, as to which the date is July 2, 2006
Tel Aviv, Israel
F-2
Consolidated Balance Sheets as at December 31
----------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2005
----------- ----------- ---------------
Note NIS thousands US $ thousands
--------- ----------------------------- ---------------
Assets
Current assets
Cash and cash equivalents 318,798 291,299 69,259
Short-term deposits and investments 4 541,159 372,137 117,567
Trade receivables 5 93,544 1,759,698 20,322
Other receivables 6 87,937 483,450 19,104
Inventories and work in progress 7 90,909 2,158,659 19,750
Assets designated for sale 10 - 41,765 -
--------- ---------- ---------
1,132,347 5,107,008 246,002
--------- ---------- ---------
Investments and long-term receivables
Investments in affiliates 8 2,668,193 1,326,261 579,664
Other investments and receivables 9 547,013 392,763 118,838
--------- ---------- ---------
3,215,206 1,719,024 698,502
--------- ---------- ---------
Fixed assets 10 726,606 2,709,106 157,855
--------- ---------- ---------
Intangible assets, deferred tax assets and
deferred expenses 11 19,461 2,321,214 4,228
--------- ---------- ---------
Assets relating to discontinued
operations 24 198,816 1,273,002 43,193
--------- ---------- ---------
5,292,436 13,129,354 1,149,780
========= ========== =========
F-3
Koor Industries Ltd. (An Israeli Corporation)
----------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2005
----------- ----------- ---------------
Note NIS thousands US $ thousands
--------- ----------------------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 272,127 1,657,200 59,119
Trade payables 13 91,606 1,557,522 19,901
Other payables 14 203,289 1,098,851 44,165
Customer advances 7 21,942 27,942 4,767
--------- --------- -------
588,964 4,341,515 127,952
--------- --------- -------
Long-term liabilities
Long-term bank loans 15 1,555,149 2,147,784 337,856
Other long-term loans 15 54,147 111,427 11,763
Debentures 15B 390,854 646,200 84,913
Deferred taxes 16G 78 234,184 17
Liability for employee severance benefits, net 17 3,860 152,541 839
--------- --------- -------
2,004,088 3,292,136 435,388
--------- --------- -------
Liabilities relating to discontinued operations 24 160,048 985,870 34,770
Contingent liabilities and commitments 18
Convertible debentures of consolidated company 15B - 165,091
--------- --------- -------
Minority Interest 56,729 2,468,275 12,324
--------- --------- -------
Shareholders' Equity 20 2,482,607 1,876,467 539,346
--------- --------- -------
5,292,436 13,129,354 1,149,780
========= ========== =========
/s/ Jonathan Kolber /s/ Gabriela Shalev /s/ Ran Maidan
----------------------------- ---------------------------------- ---------------------------
Jonathan Kolber Prof. Gabriela Shalev Ran Maidan
Chief Executive Officer Member of the Board of Directors Vice President
Chief Financial Officer
March 21, 2006, except for Note 29, as to which the date is July 2, 2006.
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
The accompanying notes are an integral part of the financial statements.
F-4
Company Balance Sheets as at December 31
----------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004 2005
----------- ----------- ---------------
Note NIS thousands US $ thousands
--------- ----------------------------- ---------------
Assets
Current assets
Cash and cash equivalents 266,962 29,665 57,997
Short-term deposits and investments 4 495,473 298,641 107,641
Short-term loans and current maturities
of loans to investee companies 37,212 49,928 8,085
Receivables:
Investee companies 2,606 9,435 566
Others 6 16,095 84,038 3,497
Assets designated for sale 10 - 41,765 -
--------- --------- -------
818,348 513,472 177,786
--------- --------- -------
Investments and long-term receivables
Investments in investees 8 2,966,365 3,601,557 644,442
Other investments and receivables 9 356,664 33,175 77,485
--------- --------- -------
3,323,029 3,634,732 721,927
--------- --------- -------
Fixed assets 10 62,367 22,484 13,549
--------- --------- -------
4,203,744 4,170,688 913,262
========= ========= =======
F-5
Koor Industries Ltd. (An Israeli Corporation)
---------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004 2005
----------- ----------- ---------------
Note NIS thousands US $ thousands
--------- ----------------------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 204,715 719,730 44,474
Trade payables 13 1,223 383 266
Other payables:
Investee companies - 14,311 -
Others 14 95,587 49,132 20,766
--------- --------- -------
301,525 783,556 65,506
--------- --------- -------
Long-term liabilities
Loans from banks and others 15 1,028,758 1,505,690 223,497
Debentures 15B 390,854 - 84,913
Liability for employee severance benefits, net 17 - 4,975 -
--------- --------- -------
1,419,612 1,510,665 308,410
--------- --------- -------
Contingent liabilities and commitments 18
Shareholders' equity 20 2,482,607 1,876,467 539,346
--------- --------- -------
4,203,744 4,170,688 913,262
========= ========= =======
/s/ Jonathan Kolber /s/ Gabriela Shalev /s/ Ran Maidan
----------------------------- ---------------------------------- ---------------------------
Jonathan Kolber Prof. Gabriela Shalev Ran Maidan
Chief Executive Officer Member of the Board of Directors Vice President
Chief Financial Officer
March 21, 2006, except for Note 29, as to which the date is July 2, 2006.
The accompanying notes are an integral part of the financial statements.
F-6
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Operations for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1)(2) 2003(1)(2)(3) 2005
--------- ----------- ------------- --------------
Note NIS thousands US $ thousands
---- ---------------------------------------------- --------------
Revenues and earnings
Revenue from sales and
services 23A 988,382 8,007,613 6,338,626 214,726
Group's equity in the
operating results of investee
companies, net 23G 363,535 (35,060) (116,729) 78,978
Other income, net 23F 223,205 - - 48,491
--------- --------- --------- -------
1,575,122 7,972,553 6,221,897 342,195
--------- --------- --------- -------
Costs and losses
Cost of sales and services 23B 801,657 5,277,615 4,229,284 174,160
Selling and marketing expenses 23C 89,146 1,066,064 835,033 19,367
General and administrative
expenses 23D 163,964 460,345 384,441 35,621
Other expenses, net 23F - 72,392 194,239 -
Financing expenses, net 23E 182,957 272,084 236,488 39,747
--------- --------- --------- -------
1,237,724 7,148,500 5,879,485 268,895
--------- --------- --------- -------
Earnings before income tax 337,398 824,053 342,412 73,300
Income tax 16H (80,701) (272,330) (93,853) (17,533)
--------- --------- --------- -------
256,697 551,723 248,559 55,767
Minority interest in
consolidated companies'
results, net 9,135 (430,921) (207,006) 1,985
Net earnings from
continuing operations 265,832 120,802 41,553 57,752
Net earnings from
discontinued operations 24 50,381 24,188 4,809 10,945
Cumulative effect as of the
beginning of the year of
change in accounting
method (see Note 2S(1)) (3,054) - - (663)
--------- --------- --------- -------
Net earnings for the year 313,159 144,990 46,362 68,034
========= ========= ========= =======
NIS NIS NIS US$
--------- --------- --------- -------
Basic and diluted earnings
(loss) per NIS 1 par value
of ordinary shares: 27
From continuing operations 16,057 7,374 2,644 3,488
From discontinued operations 3,043 1,477 306 661
From cumulative effect of
change in accounting method (184) - - (40)
Net earnings for the year 18,916 8,851 2,950 4,109
========= ========= ========= =======
(1) See Note 1B relating to reclassification of statement of operations.
(2) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(3) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003. The accompanying notes are an
integral part of the financial statements.
F-7
Koor Industries Ltd. (An Israeli Corporation)
Company Statements of Operations for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
---------- ----------- ---------- --------------
Note NIS thousands US $ thousands
---- ----------------------------------------------- --------------
Revenues and earnings
Management services
from subsidiaries 20,024 22,334 25,006 4,350
Koor's equity in the
operating results of
investee companies, net 23G 134,616 26,200 36,270 29,246
Other income, net 23F 438,133 234,959 5,691 95,184
------- ------ ------ -------
592,773 283,493 66,967 128,780
------- ------ ------ -------
Costs and losses
General and administrative
expenses 23D 57,295 46,648 41,164 12,447
Financing expenses, net 23E 144,836 110,806 35,108 31,466
------- ------ ------ -------
202,131 157,454 76,272 43,913
------- ------ ------ -------
Earnings (loss) before
income tax 390,642 126,039 (9,305) 84,867
Income tax (77,483) 18,951 55,667 (16,833)
------- ------ ------ -------
Net earnings for the year 313,159 144,990 46,362 68,034
======= ======= ====== ======
(1) See Note 1B relating to reclassification of statement of operations,
(2) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-8
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Shareholders' Equity
-----------------------------------------------------------------------------------------------------------------------------------
Company
Amounts shares held
Number of received in by the
ordinary Share Capital respect of Company and
shares (1) capital reserves stock options subsidiaries
-------------- --------- ---------- ------------- -------------
NIS thousands
----------------------------------------------------------------------------
Balance at January 1, 2003* 15,173,377 564,515 2,564,099 - (272,458)
Changes during 2003:
Net earnings for the year - - - - -
Exercise of stock options
granted to employees 67,783 - - - -
Issuance of treasury stock
(see Note 20B) 500,000 - - - 192,137
Cancellation of provision for
decline in value of
autonomous investee (
see Note 3A(1)) - - - - -
Cumulative foreign
currency translation
adjustments, net - - - - -
------------ ----------- - --------- -------- -----------
Balance at December 31, 2003 * 15,741,160 564,515 2,564,099 - (80,321)
Changes during 2004:
Net earnings for the year - - - -
Exercise of stock options
granted to employees 83,025 - - -
Cumulative foreign
currency translation
adjustments, net - - - - -
------------ ----------- - --------- -------- -----------
Balance as December 31, 2004 15,824,185 564,515 2,564,099 - (80,321)
Changes during 2005:
Net earnings for the year - - - - -
Issuance of treasury stock (2) 193,229 - - - 74,250
Issuance of stock options (3) - - - 21,715 -
Exercise of stock options
granted to employees 129,254 - - - -
Cumulative foreign currency
translation adjustments, net - - - - -
------------ ----------- ---------- -------- -----------
Balance as December 31, 2005 16,146,668 564,515 2,564,099 21,715 (6,071)
=========== ========== ========== ======== ===========
[table continued]
Cumulative
foreign
currency
translation Accumulated
adjustments losses Total
-------------- ----------- -----------
NIS thousands
------------------------------------------------
Balance at January 1, 2003* (120,609) (1,008,378) 1,727,169
Changes during 2003:
Net earnings for the year - 46,362 46,362
Exercise of stock options
granted to employees - - -
Issuance of treasury stock
(see Note 20B) - (149,126) 43,011
Cancellation of provision for
decline in value of
autonomous investee (
see Note 3A(1)) 73,401 - 73,401
Cumulative foreign
currency translation
adjustments, net (149,550) - (149,550)
------------ ----------- ----------
Balance at December 31, 2003 * (196,758) (1,111,142) 1,740,393
Changes during 2004:
Net earnings for the year - 144,990 144,990
Exercise of stock options
granted to employees - - -
Cumulative foreign
currency translation
adjustments, net (8,916) - (8,916)
------------ ----------- ----------
Balance as December 31, 2004 (205,674) (966,152) 1,876,467
Changes during 2005:
Net earnings for the year - 313,159 313,159
Issuance of treasury stock (2) - (24,641) 49,609
Issuance of stock options (3) - - 21,715
Exercise of stock options
granted to employees - - -
Cumulative foreign currency
translation adjustments, net 221,657 - 221,657
------------ ----------- ----------
Balance as December 31, 2005 15,983 (677,634) 2,482,607
============ =========== ==========
* See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
(1) Net of the Company holdings and its subsidiaries' holdings.
(2) See Note 20B
(3) See Note 20D.
The accompanying notes are an integral part of the financial statements.
F-9
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Shareholders' Equity (cont'd)
----------------------------------------------------------------------------------------------------------------------------------
Convenience translation into US Dollars (Note 1C)
Company Cumulative
Amounts shares held foreign
received in by the currency
Share Capital respect of Company and translation Accumulated
capital reserves stock options subsidiaries adjustments losses Total
------------- -------- ------------- ------------ ----------- ----------- -------
US$ thousands
---------------------------------------------------------------------------------------------------
Balance at January 1, 2005 122,641 557,050 - (17,450) (44,683) (209,897) 407,661
Changes during 2005
Net earnings for the year - - - - - 68,034 68,034
Issuance of treasury stock (1) - - - 16,131 - (5,353) 10,778
Issuance of stock options (2) - - 4,718 - - - 4,718
Exercise of stock options
granted to employees - - - - - - -
Cumulative foreign
currency translation
adjustments - - - - 48,155 - 48,155
------------- -------- ------------- ------------ ----------- ----------- -------
Balance at December 31, 2005 122,641 557,050 4,718 (1,319) 3,472 (147,216) 539,346
============= ======== ============= ============ =========== =========== =======
* Represents an amount lower than US$ 1 thousand.
(1) See Note 20B.
(2) See Note 20D.
The accompanying notes are an integral part of the financial statements.
F-10
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- ----------------
Cash flows generated by operating activities
Net earnings for the year 313,159 144,990 46,362 68,034
Adjustments to reconcile net earnings to net cash
flows generated by operating activities (A) (311,190) 707,195 802,260 (67,606)
------------- ----------- ------------ --------------
Net cash inflow (outflow) generated by continuing
operating activities 1,969 852,185 848,622 428
Net cash inflow (outflow) generated by
discontinued
operating activities (177,020) 42,221 (75,572) (38,458)
------------- ----------- ------------ --------------
Net cash flows from operating activities (175,051) 894,406 773,050 (38,030)
============= =========== ============ ==============
Cash flows generated by investing activities:
Purchase of fixed assets (23,233) (211,369) (164,886) (5,047)
Investment grants in respect of fixed assets 2,226 6,908 8,482 484
Amounts charged to intangible assets
and deferred expenses (1,351) (153,206) (313,125) (294)
Additional investments in subsidiaries - - (600) -
Acquisition of subsidiaries (B) - (293,781) (14,372) -
Investments in affiliates - (646,672) (6,316) -
Investments in loans to affiliates - (1,680) (1,616) -
Repayment of loans from affiliates and others - - 226,765 -
Proceeds from realization of investments
in formerly consolidated subsidiaries,
net of cash in those subsidiaries at the
time they ceased being consolidated (C) 199,953 - (14,182) 43,440
Repayment of liability in respect of purchase of
subsidiary in prior years - (28,309) - -
Proceeds from realization of investment in
proportionately consolidated subsidiary at the
time it ceased being proportionately consolidated (14,122) - - (3,068)
(E)
Acquisition of minority in subsidiaries - (4,762) - -
Proceeds from disposal of investments
in investee companies and others 644,850 636,286 123,742 140,093
Proceeds from sale of fixed assets and
intangible assets 1,272 7,195 27,081 276
Investment in venture capital companies (15,426) (34,928) (13,580) (3,351)
Decrease (increase) in other investments, net (352,565) (5,110) 7,465 (76,595)
Decrease (increase) in short-term deposits
and investments, net (167,297) 16,910 372,833 (36,345)
Proceeds from realization of subsidiary's shares
that became proportionately consolidated (D) - 38,239 - -
------------- ----------- ------------ --------------
Net cash inflow (outflow) generated by
continuing investing activities 274,307 (674,279) 237,691 59,593
Net cash inflow (outflow) generated by
discontinued investing activities 144,623 (48,560) 28,894 31,419
------------- ----------- ------------ --------------
Net cash flows from investing activities 418,930 (722,839) 266,585 91,012
============= =========== ============ ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A Industries and Note 3C(1) relating to
discontinuance of proportionate consolidation of Telrad Networks.
(2) See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-11
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- ----------------
Cash flows generated by financing activities
Proceeds form issuance of debentures 375,535 - - 81,585
Proceeds from issuance of stock options 21,715 - - 4,718
Proceeds from issuance of treasury stock 49,609 - 43,011 10,778
Issuance of shares to minority interest in
subsidiaries 7,938 14,466 14,137 1,725
Dividend paid to minority interest
in subsidiaries - (107,006) (56,529) -
Issuance of convertible debentures in subsidiary - 665,982 - -
Receipt of long-term loans and other
long-term liabilities 1,337,534 973,463 949,392 290,579
Repayment of long-term loans, debentures
and other long-term liabilities (1,886,717) (1,781,944) (1,806,899) (409,889)
Increase (decrease) in credit from banks
and others, net (475,089) 10,494 (299,604) (103,213)
------------- ----------- ------------ --------------
Net cash outflow generated by continuing
financing activities (569,475) (224,545) (1,156,492) (123,717)
Net cash inflow (outflow) generated by
discontinued financing activities 16,486 96,476 (53,291) 3,582
------------- ----------- ------------ --------------
Net cash flows from financing activities (552,989) (128,069) (1,209,783) (120,135)
============= =========== ============ ==============
Translation differences in respect of cash
balances of autonomous foreign investee
companies in continuing operations 624 (8,913) (10,272) 135
Translation differences in respect of cash
balances of autonomous foreign investee
companies in discontinued operations 21,929 (6,945) (18,001) 4,764
------------- ----------- ------------ --------------
Increase (decrease) in cash and cash
equivalents (286,557) 27,640 (198,421) (62,254)
Increase (decrease) in cash and cash
equivalents from discontinued operations * 314,056 (83,192) 117,970 68,229
------------- ----------- ------------ --------------
Increase (decrease) in cash and cash
equivalents from continuing operations 27,499 (55,552) (80,451) 5,975
Balance of cash and cash equivalents
at beginning of year 291,299 346,851 427,302 63,285
------------- ----------- ------------ --------------
Balance of cash and cash equivalents
at end of year 318,798 291,299 346,851 69,260
============= =========== ============ ==============
* Including proceeds received from realization of subsidiary classified
as discontinued operations in the amount of NIS 320,074 thousand.
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(2) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-12
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- ----------------
A. Adjustments to reconcile net earnings
to net cash flows generated by
operating activities:
Income and expenses not involving cash flows:
Earnings from discontinued operations (50,381) (24,188) (4,809) (10,945)
Minority interest in earnings (losses) of
subsidiaries, net (9,135) 430,921 207,006 (1,985)
Group's equity in operating results of affiliates,
net (269,328) 36,493 115,537 (58,512)
Depreciation and amortization 42,920 431,004 406,977 9,324
Deferred taxes, net 71,034 40,865 (29,203) 15,432
Increase (decrease) in liabilities in respect of
employee severance benefits, net 25,281 29,824 (69,674) 5,492
Net capital losses (gains) from realization of:
Fixed assets and intangible assets 78 16,574 22,618 17
Investments in formerly consolidated
subsidiaries (204,619) - (16,428) (44,453)
Investments in investee companies (76,653) (227,477) (4,852) (16,653)
Linkage of debentures and amortization
of bond discount 15,318 - - 3,328
Inflationary erosion (linkage) of principal of
long-term loans and other liabilities 35,645 7,572 (82,644) 7,744
Inflationary erosion of value of investments,
deposits and loans receivable (14,299) 16,534 38,968 (3,107)
Impairment in value of assets and investments
(primarily venture capital investments) 68,746 58,144 70,503 14,935
------------- ----------- ------------ --------------
(365,393) 816,266 653,999 (79,383)
------------- ----------- ------------ --------------
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(2) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-13
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
A. Adjustments to reconcile net earnings
to net cash flows generated by
operating activities (cont'd):
Changes in operating asset and liability items:
Increase in trade receivables and
other receivables (after taking into
account non-current receivables) (36,613) (129,753) (205,869) (7,954)
Decrease (increase) in inventories (including
long-term customer advances and deposits) 13,856 (290,022) (18,276) 3,010
Increase in trade payables and other payables 76,960 310,704 372,406 16,721
------------- ----------- ------------ --------------
54,203 (109,071) 148,261 11,777
------------- ----------- ------------ --------------
(311,190) 707,195 802,260 (67,606)
============= =========== ============ ==============
B. Acquisition of subsidiaries
Assets and liabilities of the subsidiaries
at date of acquisition:
Working capital, excluding cash and
cash equivalents - (38,239) (12,160) -
Issuance of shares by investee company - 34,238 - -
Fixed assets and investments, net - (286,907) (2,404) -
Long-term liabilities - 187,019 192 -
Goodwill - (189,892) - -
------------- ----------- ------------ --------------
- (293,781) (14,372) -
============= =========== ============ ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(2) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-14
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
C. Proceeds from realization of
investments in formerly
consolidated subsidiaries, net of cash
in those subsidiaries at the time
they ceased being consolidated
Assets and liabilities of the formerly
consolidated subsidiaries at the time
they ceased being consolidated:
Working capital surplus (deficit), excluding
cash and cash equivalents 1,031,023 - (47,105) 223,989
Fixed assets and investments 1,971,804 - 8,765 428,374
Intangible assets 2,316,290 - 15,440 503,213
Long-term liabilities (1,601,477) - (3,463) (347,920)
Investments in affiliated companies, net (1,315,995) - 12,971 (285,899)
Realization of foreign currency translation
adjustments of financial statements of
autonomous investees 18,141 - - 3,941
Capital gain (loss) on sale of investments in
subsidiaries 200,987 - (790) 43,664
Minority interest (2,420,820) - - (525,922)
------------- ----------- ------------ --------------
199,953 - (14,182) 43,440
============= =========== ============ ==============
D. Proceeds from realization of subsidiary's
shares that became proportionately
consolidated
Working capital surplus excluding cash and
cash equivalents - 23,057 - -
Fixed assets, investments and intangible assets - 40,851 - -
Realization proceeds receivable - (25,544) - -
Capital loss - (125) - -
------------- ----------- ------------ --------------
- 38,239 - -
============= =========== ============ ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(2) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003.
F-15
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004(1) 2003(1)(2) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
E. Proceeds from realization of investment in
proportionately consolidated subsidiary
at the time it ceased being proportionately
consolidated
Assets and liabilities of formerly proportionately
consolidated subsidiary, at the time it ceased
being proportionately consolidated:
Working capital surplus, excluding cash
and cash equivalents 36,900 - - 8,017
Fixed assets and investments 129,917 - - 28,224
Long-term liabilities (62,023) - - (13,475)
Investments in affiliated companies, net (117,623) - - (25,554)
Capital gain 3,632 - - 789
Minority interest (4,925) - - (1,069)
------------- ----------- ------------ --------------
(14,122) - - (3,068)
============= =========== ============ ==============
F. Non-cash transactions
Purchase of fixed assets by credit 4,712 9,172 24,514 1,024
============= =========== ============ ==============
Purchase of other assets by credit - 28,178 6,639 -
============= =========== ============ ==============
Proceeds from sale of fixed assets, formerly
consolidated subsidiaries and realization
of activities - - 15,145 -
============= =========== ============ ==============
Proposed dividend to minority shareholders
by subsidiaries - 29,614 15,446 -
============= =========== ============ ==============
Dividend in kind from affiliated company - 33,363 - -
============= =========== ============ ==============
Loans converted into shareholders' equity
of subsidiary 13,419 14,042 - 2,915
============= =========== ============ ==============
Conversion of investment to loan in an affiliate - - 470 -
============= =========== ============ ==============
(1) See Note 3B(2) relating to discontinuance of consolidation of M-A
Industries and Note 3C(1) relating to discontinuance of proportionate
consolidation of Telrad Networks.
(2) See Note 2B with respect to discontinuance of adjustment for the effect
of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-16
Koor Industries Ltd. (An Israeli Corporation)
Company Statements of Cash Flows for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004 2003(1) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
Cash flows generated by operating activities:
Net earnings for the year 313,159 144,990 46,362 68,034
Adjustments to reconcile net income to net cash
flows generated by operating activities (A) (432,634) (136,907) (163,429) (93,990)
------------ ----------- ------------- --------------
Net cash inflow (outflow) generated by
operating activities (119,475) 8,083 (117,067) (25,956)
------------ ----------- ------------- --------------
Cash flows generated by investing activities:
Investee companies:
Acquisition of shares (23,442) (667,779) (17,488) (5,093)
Loans granted, capital notes and
non-current accounts 40,631 34,950 304,725 8,827
Purchase of fixed assets (176) (423) (392) (38)
Increase in investments and
other receivables, net (351,631) - (31,428) (76,392)
Proceeds from sale of fixed assets 8 - 30 2
Proceeds from realization of investments
in investee companies 1,372,044 562,177 102,875 298,076
Investment in short-term deposits and
investments, net (143,307) 63,412 460,818 (31,134)
------------ ----------- ------------- --------------
Net cash inflow (outflow) generated by
investing activities 894,127 (7,663) 819,140 194,248
------------ ----------- ------------- --------------
Cash flows generated by financing activities:
Proceeds from issuance of debentures 375,535 - - 81,585
Proceeds from issuance of stock options 21,715 - - 4,718
Proceeds from issuance of treasury stake 49,609 - 43,011 10,778
Receipt of long-term loans and other
long-term liabilities 1,007,119 637,000 360,213 218,796
Payments of long-term loans and
other long-term liabilities (1,812,366) (628,703) (1,107,283) (393,736)
Credit from banks and others, net (178,967) 11,743 (13,600) (38,881)
------------ ----------- ------------- --------------
Net cash inflow (outflow) generated by
financing activities (537,355) 20,040 (717,659) (116,740)
------------ ----------- ------------- --------------
Increase (decrease) in cash and cash
equivalents 237,297 20,460 (15,586) 51,552
Balance of cash and cash equivalents at
beginning of year 29,665 9,205 24,791 6,445
------------ ----------- ------------- --------------
Balance of cash and cash equivalents at
end of year 266,962 29,665 9,205 57,997
============ =========== ============= ==============
(1) See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-17
Koor Industries Ltd. (An Israeli Corporation)
Company Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 1C)
--------------
2005 2004 2003(1) 2005
------------- ----------- ------------ --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
A. Adjustments to reconcile net earnings
to cash flows generated by
operating activities
Income and expenses not involving cash flows:
Equity in operating results of investee
companies in addition, net of dividend
received therefrom (113,346) 47,879 (17,120) (24,624)
Depreciation and amortization 2,043 2,022 13,718 444
Deferred taxes, net 77,483 (18,580) (58,903) 16,832
Increase (decrease) in liability in respect of
employee severance benefits, net (1,917) 3,491 (6,898) (416)
Net capital losses (gains) from realization of:
Fixed assets 7 - 96 2
Investment in investee companies (424,261) (213,249) (11,635) (92,171)
Increase in value of deposits and other
erosions, net (13,611) (6,623) (11,260) (2,957)
Exchange rate differences and erosion of
long-term loans and other liabilities 49,006 6,077 (24,865) -
Erosion (linkage) of loans from banks
and others - - (10,526) 10,647
Changes in value of investments and assets (377) - 673 (82)
------------- ----------- ------------ --------------
(424,973) (178,983) (126,720) (92,325)
------------- ----------- ------------ --------------
Changes in operating assets and liability items:
Decrease (increase) in current accounts of
investee companies, net 2,103 36,543 (43,975) 457
Decrease (increase) in receivables (9,535) (213) 42,817 (2,072)
Increase (decrease) in trade payables
and other payables (229) 5,746 (35,551) (50)
------------- ----------- ------------ --------------
(7,661) 42,076 (36,709) (1,665)
------------- ----------- ------------ --------------
(432,634) (136,907) (163,429) (93,990)
============= =========== ============ ==============
B. Significant non-cash transactions
Liquidation dividend from subsidiary 14,407 - - 3,130
============= =========== ============ ==============
Loans converted into shareholders' equity
of subsidiary 46,588 6,837 - 10,121
============= =========== ============ ==============
(1) See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
The accompanying notes are an integral part of the financial statements.
F-18
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 1 - General
A. Koor Industries Ltd. is a holding company, engaged mainly in
the fields of telecommunications, agro-chemicals, tourism,
defense industry and venture capital investments, through its
subsidiaries, proportionately consolidated companies and
affiliates (the "Koor Group" or the "Group").
The Company's shares are traded both on the Tel Aviv Stock
Exchange and on the New York Stock Exchange.
B. During 2005, the Company sold part of its investments in
Makhteshim-Agan Industries Ltd. (as discussed in Note 3B(2))
and Telrad Networks Ltd. (as discussed in Note 3C(1)). As a
result, the Koor Group ceased to control these companies and
which has resulted in their deconsolidation during 2005. The
companies are now included in the consolidated financial
statements according to the equity method.
As a result of the deconsolidation of these companies and to
reflect the nature of the Group's activities as a holding
company, management has classified the statement of operations
in a single-stage format. Total revenues and income, including
the Group's equity in the results of affiliates, are presented
within revenues. The comparative figures have been
reclassified on a consistent basis.
C. The adjusted financial statements as at December 31, 2005, and
for the year ended have been translated into U.S. dollars
using the representative exchange rate at that date ($1 = NIS
4.603). The translation was made solely for the convenience of
the reader. The amounts presented in these financial
statements should not be construed to represent amounts
receivable or payable in dollars or convertible into dollars,
unless otherwise indicated in these financial statements.
Note 2 - Significant Accounting Policies
The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Israel.
The significant accounting policies, which were applied on a consistent
basis, are as follows:
A. Definitions:
In these financial statements:
1. The Company - Koor Industries Ltd. ("Koor" or "the Company").
2. The Group - Koor Industries Ltd. and its investees
3. Subsidiaries - companies, including partnerships, whose statements are fully
consolidated, directly or indirectly, with those of the Company.
4. Proportionately consolidated - jointly controlled companies, which are proportionately
companies consolidated, directly or indirectly, in Koor's consolidated
financial statements.
companies
F-19
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
---------------------------------------------------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
A. Definitions (cont'd):
5. Affiliates - companies in which voting rights grant the Company significant
influence over the operating and financial policies of these
companies, and which are not subsidiaries or proportionately
consolidated companies. Such companies are included on the equity
basis.
6. Investees - subsidiaries, proportionately consolidated companies or affiliates.
7. Other companies - companies in which the investment does not confer significant
influence, and are accounted for by the cost method.
8. Interested parties - - as defined in Paragraph (1) of the definition of "interested
parties" in Section 1 of the Israeli Securities Law - 1968.
9. Related parties - as defined in Opinion No. 29 of the Institute of Certified Public
Accountants in Israel ("ICPAI").
10. Controlling shareholders - as defined in the Israeli Securities Regulations (Financial
Statement Presentation of Transactions between a Company and its
Controlling Shareholder) - 1996.
11. Venture capital fund - as defined in Standard No. 1 of the Israel Accounting Standards
Board ("IASB").
12. Venture capital investments - an investment in a company that meets two conditions:
(a) The Company is engaged primarily in research, development
or marketing of innovative and intellectual property
intensive products or processes; and
(b) At least 90% of the company's financing stems from
shareholder equity (including shareholder loans and
shareholders' guaranteed credit), support of State
authorities or research grants.
13. Consumer Price Index - the Israeli Consumer Price Index (CPI) published by the Central
Bureau of Statistics.
14. Dollar - U.S. dollar.
15. Adjusted amount - the historical nominal amount adjusted in conformity with the
provisions of Opinions 23 and 34 and Opinions 36 and 37.
16. Reported amount - the adjusted amount as at the transition date (December 31, 2003),
with the addition of amounts in nominal values that were added
after the transition date and less amounts eliminated after the
transition date.
17. Adjusted financial reporting - financial reporting based on the provisions of Opinions 23, 34,
36, 37 and 50.
18. Nominal financial reporting - financial reporting based on reported amounts.
F-20
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
B. Financial statements in reported amounts
(1) In October 2001, the Israel Accounting Standards Board
published Accounting Standard No. 12 on "Discontinuation of
Adjustment of Financial Statements". According to this
standard, and in accordance with Accounting Standard No. 17
published in December 2002, the adjustment of financial
statements for the effect of changes in the general purchasing
power of the shekel was discontinued, commencing January 1,
2004. Until December 31, 2003, the Group continued to prepare
adjusted financial statements in accordance with Opinion No.
36 of the ICPAI. The Group is applying the provisions of the
Standard and, accordingly, the adjustment was discontinued,
commencing January 1, 2004.
(2) In the past, the Company prepared its financial statements on
the basis of historical cost, adjusted to the CPI. The
adjusted amounts included in the financial statements as at
December 31, 2003, served as the starting point for the
nominal financial reporting as of January 1, 2004. Additions
made during the period were included in nominal values.
(3) The non-monetary asset amounts do not necessarily represent
their realizable or current economic value, but only the
reported amounts of such assets.
(4) In the financial statements, the term "cost" means cost in
reported amount.
(5) The financial statements of certain companies classified as
autonomous units are stated based on the changes in the
exchange rates of their relevant functional currencies - see
2D below.
(6) All comparative data for prior period until January 1, 2004
are stated adjusted to the CPI of December 2003.
C. Reporting principles
(1) Balance sheets:
a. The equity value of investments in investees was
determined based on the reported financial statements
of these companies.
b. Non-monetary items (mainly - fixed assets, inventory,
investments stated at cost and equity items) are
stated in reported amounts.
c. Monetary items are stated in the balance sheet at
historical nominal values as at the balance sheet
date.
F-21
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
C. Reporting principles (cont'd)
(2) Statements of operations:
a. The equity in the results of operations of investees
and the minority interest in the results of
subsidiaries were determined based on the reported
financial statements of such companies.
b. Revenues and expenses deriving from non-monetary
items (such as: depreciation and amortization,
changes in inventory, prepaid expenses and income,
etc.) or from provisions included in the balance
sheet, are derived from the change between the
reported amounts of the opening balance and the
reported amount of the closing balance.
c. The remaining statement of operations items (such as:
sales, purchases, current manufacturing costs, etc.)
are stated at nominal values.
(3) Statement of changes in shareholders' equity:
A dividend declared in the reporting period is stated in
nominal values.
D. Effects of the changes in foreign currency exchange rates
The Company is applying Accounting Standard No. 13 "Effect of Changes
in Exchange Rates of Foreign Currency" since January 1, 2004. The
Standard discusses the translation of foreign currency transactions and
the translation of financial statements of foreign operations for their
inclusion in the financial statements of the reporting entity. The
Standard provides rules for classifying foreign operations as an
autonomous foreign investee or as an integrated investee, based on
indications described in the Standard and the use of judgement, as well
as the method for translating the financial statements of autonomous
foreign investees.
Foreign currency transactions
-----------------------------
Transactions denominated in foreign currency are recorded when first
recognized at the exchange rate prevailing on the transaction date.
Exchange rate differences arising upon the settlement of monetary
items, or upon reporting of the Group's monetary items at exchange
rates that are different than those used for initial recognition during
the period, or from those reported in prior financial statements, are
charged to the statement of operations.
F-22
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
D. Effects of the changes in foreign currency exchange rates (cont'd)
Foreign operations classified as an autonomous investee
-------------------------------------------------------
Certain investees domiciled in Israel earn revenues and purchase the
raw materials and fixed assets primarily in dollars. The dollar is also
the primary currency of the economic environment in which such
investees operate. In accordance with the principles prescribed in
Section 29(a) of Opinion No. 36 of the ICPAI the dollar constitutes the
measurement and reporting currency in their financial statements.
The financial statements of investees operating in foreign countries as
an "autonomous investee", and companies incorporated in Israel for
which the measurement and reporting currency is the dollar are
translated to Israeli currency as follows:
(1) The assets and liabilities, both monetary and non-monetary of
an autonomous foreign investee were translated according to
the closing rate. Goodwill is also translated at the closing
rate, beginning January 1, 2004.
(2) Income and expense items are translated at the exchange rate
prevailing on the transaction date.
(3) All exchange rate differences created are classified as a
separate item in shareholders' equity until the investee is
disposed of.
Impairment in the value of an investment in an autonomous foreign
investee does not constitute a partial disposal and therefore, no part
of the translation differences is charged to the statement of
operations at the time of the impairment.
Foreign operations classified as integrated investee
----------------------------------------------------
The financial statements of investees operating oversees that are an
"integrated investee" of the Group, in accordance with the tests
prescribed in Standard No. 13 of the IASB, are translated from foreign
currency to Israeli currency - with non-monetary items translated at
the historical exchange rate prevailing on the transaction date and
monetary items translated at the exchange rate prevailing on the
balance sheet date. Statement of operations items are translated at the
average exchange rate, except for revenues and expenses related to
non-monetary items that were translated at the historical exchange
rates at which the related non-monetary items were translated.
Differences resulting from the translation are charged to financing
expenses.
F-23
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
E. Consolidation of financial statements
(1) The consolidated financial statements include the
financial statements of the Company and of all the
companies in which the Company has control. Jointly
controlled companies are included in the consolidated
financial statements by the proportionate
consolidation method. A jointly controlled entity is
an entity in which all the shareholders, by way of
contractual arrangement, jointly control the
significant operating policies thereof.
(2) Regarding companies that were consolidated in the
past and are not included in the consolidation in the
reporting year - see Note 3B(2) and Note 3C(1).
(3) For the purpose of the consolidation, the amounts
included in the financial statements of the
consolidated companies were included after the
adjustments necessitated by the application of the
uniform accounting principles adopted by the Group.
(4) The consolidated financial statements include the pro
rata share of asset, liability, income and expense
items of proportionately consolidated companies,
based on the holding percentages in these companies.
(5) As to the financial statements of subsidiaries that
are adjusted according to changes in foreign currency
exchange rates - see Note 2D above.
(6) a. The excess cost of business over the fair value of
its identified assets less the fair value of the
identified liabilities (after allocation of the tax
deriving from temporary differences) on acquisition
date, is charged to goodwill.
b. The excess cost allocated to assets and liabilities
is charged to the appropriate balance sheet items.
c. The excess book value over the cost of the investment
is deducted first from intangible assets. Negative
excess cost remaining after the allocation to
intangible assets is deducted from non-monetary
assets on a pro rata basis to the fair value of these
assets, based on the Company's share. The balance of
the negative excess cost, after the said allocation,
is stated in the consolidated balance sheet as
deferred income and will be amortized on a
straight-line basis over ten years.
d. Goodwill is stated in the consolidated balance sheet
in "Intangible assets, deferred tax assets and
deferred expenses" and is systematically amortized
over its estimated useful life. The amortization
period represents the best possible estimate of the
period in which the Company expects to derive future
economic benefit from the goodwill. The Group
companies amortize goodwill mainly over a period of
10 to 20 years (see Note 2AD(5)).
F-24
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
E. Consolidation of financial statements (cont'd)
(7) Material intercompany balances and transactions between Group
companies were eliminated for consolidation purposes.
Likewise, material unrealized income from intercompany sales
not yet realized outside the Group were eliminated.
(8) The Company's shares that were acquired by the Company and
subsidiaries are recorded as treasury stock.
(9) According to the criteria prescribed in Opinions 48 and 53 of
the IACPA, when the sale and/or exercise of convertible
securities that were issued by investees (including of
employee options) is probable, and a decline in the
shareholding percentage is expected upon conversion or
exercise, as a result of which the holder will sustain a loss,
an appropriate provision is included in respect of the
anticipated loss. (See Note 2AD(1).)
F. Use of estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to use estimates and
assessments in determining the reported amounts of assets, liabilities,
revenues, expenses and the disclosure relating to contingent assets and
liabilities. Actual results may differ from such estimates.
G. Cash and cash equivalents
Cash and cash equivalents include short-term bank deposits and
short-term government loans traded in banks, with an original maturity
of three months or less, on the date of investment, and which are not
restricted.
H. Marketable Securities
(1) Marketable securities
---------------------
Investments in marketable securities held for the short-term
as current investments are stated according to the stock
market price as at the balance sheet date. The changes in the
fair value of the securities are recorded in the statement of
operations in each reporting period.
Investments in marketable securities, which are permanent
investments (held to maturity), are stated at cost (debentures
- including accrued interest), net of a provision for decrease
in value that is not of a temporary nature (see also section
(3) below).
(2) Non-marketable securities
-------------------------
Non-marketable securities are stated at cost (debentures -
including accrued interest), which, in management's opinion is
not higher than realization value (see also section (3)
below).
F-25
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
H. Marketable Securities Cont'd):
(3) Decrease in value of investments
--------------------------------
From time to time, the Group evaluates whether there has been
a non-temporary decrease in value in its permanent investments
in other companies. Such a review is carried out where there
are indications of the possibility that the value of permanent
investments has been impaired, including a decline in stock
market prices, the investee's businesses, the industry in
which the investee operates and other parameters. The
impairment in value of these investments, which is not
temporary, and which management bases on an evaluation of all
the relevant aspects after giving appropriate weight to each
of them, is charged to the statement of operations.
I. Allowance for doubtful accounts
The financial statements include allowances for doubtful accounts,
which management believe that fairly reflect the loss inherent in
accounts whose collection is doubtful. Management determines the
allowances on information it has on the financial status of debtors,
the volume of their activity and a valuation of the collateral received
from them. The allowance is determined specifically for accounts whose
collection is doubtful.
J. Sale of trade receivables
The sale of financial assets is recognized as a sale when full control
of the asset and all of the risks and rewards related to the asset are
transferred in full to an independent third party. See Note 3B(4).
K. Inventories
Inventories are valued at the lower of cost or market value. Cost is
determined as follows: Raw materials, ancillary materials and spare
parts - at "moving average" or by the "first-in, first-out" method.
Finished goods and goods in process-based on manufacturing costs
(including materials, labor and subcontractor costs) plus allocated
indirect manufacturing and other expenses. Merchandise - by the
"first-in, first-out" or the "moving average" method.
L. Projects in progress:
Work in progress under long-term contracts is stated at cost less
amounts charged to cost of revenues in the statement of operations and
associated with revenue recognized on the basis of the "percentage of
completion" method. Cost includes direct costs of materials, labor,
subcontractor and other direct costs and allocated indirect
manufacturing costs (see Note 2T(2) below).
F-26
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
M. Holdings of a venture capital fund in venture capital investments
(1) The holdings of a venture capital fund in venture capital
investments are stated at cost (at their reported amounts),
net of impairment provisions, if a non-temporary decline in
their value occurs. Gains from venture capital investments are
charged to the statement of operations when the investment is
realized. Also see Note 2H(3) above.
(2) Venture capital investments that management intends to realize
in the short-term are included in current assets on the basis
of cost, net of impairment provision, which does not exceed
the market value of the investment.
N. Investments in affiliates
(1) The investments in affiliates are presented by the equity
method. Taken into account when computing the Company's share
are losses due to the expected realization of convertible
securities issued by affiliates, if the conversion or exercise
of those securities is probable.
The equity value of the investments in these companies takes
into account the amounts as they are included in the
companies' financial statements.
(2) Regarding the goodwill amortization policy - see Note 2E(6) above.
(3) Regarding the decline in vale of investments in affiliates - see
Note 2AC.
O. Monetary balances stated at present value
Monetary balances - long-term debts and liabilities - that are interest
free or bear interest at below-market rates, are stated at their
present value, computed using the interest rate prevailing in the
market on the date created.
P. Fixed assets
1. Fixed assets are stated at cost.
2. Financing expenses on loans and credit used to finance the
construction or purchase of fixed assets, and other costs
related to the purchase or construction of the fixed assets,
are capitalized to the cost of these assets, in accordance
with Accounting Standard No. 3 on the Capitalization of
Finance Costs.
3. The cost of assets for which an investment grant was received
is stated net of the grant amount.
F-27
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
P. Fixed assets (cont'd)
4. Improvements and renovations are charged to the cost of
assets, whereas repair and maintenance expenses are charged to
the statement of operations as incurred.
The annual depreciation rates used are as follows:
%
------------
Buildings and leasehold rights 2-10 (mainly 2%)
Machinery, equipment and
facilities 5-20 (mainly 10%)
Vehicles and forklifts 10-20 (mainly 15%)
Office furniture and equipment 6-33 (mainly 6%
and 25%)
Computers and auxiliary equipment 20-33
Leasehold improvements 10*
* or the lease period, whichever is lower.
Q. Other assets and deferred expenses
Other assets and deferred expenses are amortized on a straight-line
basis over the expected period of benefit therefrom.
Licensing of products, marketing rights and intangible assets in the
purchase of products - 5 to 20 years. See Note 2E(6) regarding goodwill
deriving from the acquisition of companies that were consolidated.
Debenture issue costs - according to the debenture period (mainly 6
years).
R. Convertible securities
1. Debentures, the conversion of which is not probable, are
included at their liability value as at the balance sheet
date, in accordance with the provisions of Opinion 53 of the
ICPAI, and are stated in long-term liabilities. Debentures,
the conversion of which is probable, are disclosed on the
balance sheet between long-term liabilities and shareholders'
equity, according to the liability value or the capital value,
whichever is the higher. See Note 2AD(1).
2. In accordance with Opinions 48 and 53 of the ICPAI, the
provision for loss on a decline in the shareholding percentage
in investee companies is included in the "minority interest"
or in "investments in investees" in the consolidated balance
sheet, and in "investment in investees" in the Company balance
sheet. See Note 2AD(1).
S. Deferred taxes
In July 2004, the Israel Accounting Standards Board ("IASB") published
Accounting Standard No. 19 on "Taxes on Income" ("the Standard"). The
new Standard applies to financial statements for periods beginning on
January 1, 2005. The Standard was adopted as a cumulative effect of a
change in accounting method. The transition to Accounting Standard No.
19 resulted in a one-time effect of a net decrease in net earnings of
NIS 3 million derived mainly from an increase in liabilities for
deferred taxes relating to property.
F-28
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
S. Deferred taxes (cont'd)
The Group companies create deferred taxes in respect of temporary
differences. The temporary differences are differences in the value of
assets and liabilities for tax purposes and for financial reporting
purposes. Allocation of the taxes, as stated, is executed with respect
to the differences relating to assets, the amortization of which is
deductible for tax purposes. The deferred tax balances (asset or
liability) are calculated according to the liability approach, i.e.,
the tax rates expected to be in force when the deferred tax liability
is utilized, or when the deferred tax asset is realized, as they are
known proximate to the date of approval of the financial statements.
In calculating deferred taxes, no account was taken of the taxes, which
would apply in a case of sale of the investments in the investee
companies, since it is the intention of the Company to hold these
investments and not to sell them.
Deferred taxes were not created for taxes to be imposed on earnings
distributed by subsidiaries, as it is the Group's policy not to
distribute taxable dividends in the foreseeable future. Likewise, tax
benefits are not included in respect of temporary differences, the
realization of which is doubtful.
T. Revenue recognition
1. Sale of products and providing services
---------------------------------------
Revenues from sales and services are recognized upon delivery or
shipment of the products and transfer of the risks and rewards involved
in ownership of the products, or upon performance of the services.
Revenue from the sale of products that require customer acceptance are
recognized after the work is performed and acceptance tests are passed,
as prescribed in the product supply contract.
2. Revenues from execution of work
-------------------------------
The revenues and costs from projects in progress under long-term
contracts are recognized in accordance with Accounting Standard No. 4
("Standard 4") published by the IASB, as follows:
A. Revenues and costs from projects in progress under long-term
contracts are recognized according to the "percentage of
completion" method, if all of the following conditions are
fulfilled: the revenues are known or can be reliably
estimated, the collection of the revenues is expected, the
costs involved with execution of the work are known or capable
of being reliably estimated, there is no material uncertainty
regarding the ability to complete the work and comply with the
contractual terms with the customer and the percentage of
completion can be reliably estimated.
As long as all of the above conditions are not met, income is
recognized at the level of the costs incurred and their
recovery is expected ("zero margin").
B. The percentage of completion is measured on the basis of cost
(the ratio of the costs incurred to the total estimated costs)
or on the basis of supply of the products, in accordance with
the nature of the agreement.
C. Anticipated losses on contracts are provided for in full when
determined to be expected.
F-29
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
T. Deferred taxes (cont'd)
2. Revenues from execution of work (cont'd)
D. Estimated profit or loss from long-term contracts may change
due to changes in estimated resulting from differences between
actual performance and original forecast. The effect of such
changes in estimates are recognized in the statement of
operations at the time they are identified.
U. Research and development expenses:
Research and development costs
------------------------------
Research and development costs, net of participations (mainly from the
Government of Israel), are charged to the statement of operations as
incurred. Research and development costs financed by the customer are
charged to the cost of projects in progress, and are included in the
statement of operations as part of the recognition of results from such
projects.
In-process research and development costs
-----------------------------------------
In a business acquisition, in-process research and development expenses
are charged to the statement of operations immediately.
V. Derivative financial instruments:
The Group companies enter into option and forward contracts that are
intended to reduce the financial risks (i.e. commitments for the import
of raw materials, export of products, liabilities linked to the CPI or
foreign currency) from the exposure to fluctuations in inter-currency
exchange rates, interest rates and changes in the CPI.
The results of financial derivatives held to hedge existing assets and
liabilities are recorded in the statement of operations concurrently
with the recording of the results of the hedged assets and liabilities.
Financial derivatives that are not held for hedging are stated in the
balance sheet at fair value. Changes in the fair value are included in
the statement of operations in the period they occur. The fair value of
derivative financial instruments is determined according to their
market values, stated quotes from financial institutions, and in the
absence of such, fair value is determined based on valuation models.
W. Earnings per share:
Earnings per share data are computed in accordance with Opinion No. 55
of the ICPAI. Taken into account in the computation of basic earnings
per share are convertible securities issued by the Company, if their
conversion or exercise is probable, based on tests prescribed in the
opinion.
Taken into account in the computation of fully-diluted earnings per
share are convertible securities issued by the Company and its
investees, which were not included in the computation of basic earnings
per share, when their conversion or exercise does not increase earnings
per share. See Note 2AD(3).
F-30
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
X. Dividend declared subsequent to balance sheet date
In accordance with Accounting Standard No. 7 on "Subsequent Events",
the liability related to a dividend proposed or declared subsequent to
the balance sheet date is expressed in the accounts only in the period
in which it was declared. However, separate disclosure is provided in
the statement of changes in shareholders' equity of the dividend amount
to be distributed against a reduction in the retained earnings balance.
Y. Segment reporting
Segment reporting is presented in accordance with Accounting Standard
No. 11, which requires the inclusion of information in respect of
business and geographical segments, as well as detailed guidelines for
identification of the business and geographical segments.
Z. Discontinued operations
Discontinued operations are presented in accordance with Accounting
Standard No. 8, whereby discontinued operations are presented
separately from the data relating to continuing operations.
AA. Environmental costs
The current operating and maintenance costs of facilities to prevent
environmental pollution and provisions for expected costs related to
the rehabilitation of the environment deriving from current or past
activities, are charged to the statement of operations. Construction
costs of facilities for prevention of environmental pollution, which
increase the economic life or efficiency of the facility or reduce or
prevent environmental pollution, are charged to the cost of the fixed
assets and are depreciated in accordance with the depreciation policies
practiced by the Group.
AB. Impairment of assets
The Group applies Accounting Standard No. 15 - Impairment of Assets
("the Standard"), which prescribes procedures that the Group must
implement in order to assure that its assets in the consolidated
balance sheet are not stated at an amount exceeding their recoverable
value, which is the higher of the net sales price or the usage value
(the present value of the estimated future cash flows expected to
derive from the use and realization of the asset). The Standard applies
to all of the assets in the consolidated balance sheet, except for tax
assets, construction contracts and monetary assets (aside from monetary
assets that are investments in investees that are not subsidiaries).
Likewise, the Standard prescribes the presentation and disclosure
principles for assets that have declined in value. When the carrying
value of an asset in the consolidated balance sheet exceeds its
recoverable amount, the Group recognizes an impairment loss equal to
the difference between the book value of the asset and its recoverable
value. A loss so recognized will be reversed only if changes have
occurred in the estimates used in determining the recoverable value of
the asset since the date on which the last impairment loss was
recognized.
F-31
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
AC. Data regarding the CPI and the Dollar exchange rate:
Israeli Exchange rate
CPI* of one Dollar
------------ -------------
Points NIS
------------ -------------
<
For the year ended:
December 2005 185.05 4.603
December 2004 180.74 4.308
December 2003 178.58 4.379
% %
------------ -------------
Changes during:
2005 2.4 6.8
2004 1.2 (1.6)
2003 (1.9) (7.6)
Rate of increase (decrease) in the CPI
relative to the exchange rate
of the dollar during the year: %
------------
2005 (4.4)
2004 2.8
2003 5.7
(*) According to the CPI for the month of the balance sheet date
(1993 average basis = 100).
Assets and liabilities in foreign currency or linked thereto are
included in the financial statements according to the representative
exchange rate published by the Bank of Israel on the balance sheet
date.
Assets and liabilities linked to the CPI are included in the financial
statements according to the CPI of the balance sheet month, or the
previous month, as relevant.
AD. Impact of new accounting standards prior to their application
(1) In July 2005 the IASB published Accounting Standard No. 22,
"Financial Instruments: Disclosure and Presentation" ("the
Standard"). The Standard provides rules for financial
statement presentation of financial instruments and specifies
the proper disclosure required in respect thereto.
Furthermore, the Standard provides the method for classifying
financial instruments as financial liabilities and as
shareholders' equity, for classifying the interest, dividends,
losses and gains related to them and the circumstances for
offsetting financial assets and financial liabilities. The new
standard will apply to financial statements for periods
beginning on or after January 1, 2006. The Standard will be
adopted on a prospective basis. Furthermore, a provision for
loss that is included in the financial statements as at
December 31, 2005, in respect of an anticipated loss from a
decline in holding rate that is due to the exercise of options
or the conversion of convertible liabilities in investees,
will be reversed on the date the Standard comes into effect
under the item of a cumulative effect of change in accounting
policy. The comparative data presented in the financial
statements for periods beginning on the effective date the
standard will not be restated. The transition to the Standard
will result in an increase in shareholders' equity in the
amount of NIS 67 million due to the reversal of provisions for
losses in respect of convertible securities in investees.
F-32
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
AD. Impact of new accounting standards prior to their application
(cont'd)
(2) In September 2005 the IASB published Accounting Standard No.
24, "Share- Based Payments" ("the Standard"). The Standard
requires that share-based payment transactions, including
transactions with employees or other parties that are to be
settled by equity instruments, cash or other assets, be
recognized in the financial statements. In accordance with the
Standard, share-based payment transactions in which goods or
services are received will be recognized at their fair value.
Furthermore, the Standard provides various disclosure
requirements regarding the nature and extent of the
share-based payment arrangements that existed during the
period, and regarding the method by which the fair value of
such arrangements was determined. The Standard will apply to
financial statements for periods beginning as from January 1,
2006. The Standard's provisions should be applied to each
share-based payment transaction executed after March 15, 2005
that did not vest by the effective date of the Standard.
Furthermore, it is required that comparative data relating to
periods after March 15, 2005 be restated. With respect to
share-based payments classified as liabilities (such as
phantom plans) that exist on the effective date of the
Standard, the Standard is to be implemented retroactively and
the comparative data is to be restated. Changes in the terms
of a share-based payment transaction being settled by means of
equity instruments and executed after March 15, 2005 are to be
treated in accordance with the provisions of the new Standard.
Implementation of the new Standard is not anticipated to have
a material effect on the Group's results of operations and
financial position.
(3) In January 2006, the IASB published Accounting Standard No.
21, "Earnings per Share ("the Standard"). The Standard
provides that an entity should calculate basic earnings per
share with respect to the earnings or loss attributable to the
ordinary shareholders of the reporting entity and that the
entity should calculate basic earnings per share with respect
to the earnings or loss from continuing operations
attributable to the ordinary shareholders of the reporting
entity if such earnings or loss is presented. The basic
earnings per share will be calculated by dividing the earnings
or loss attributable to the ordinary shareholders of the
reporting entity (the numerator) by the weighted average
number of ordinary shares outstanding during the period (the
denominator). In order to calculate the diluted earnings per
share, an entity will adjust the earnings or loss attributable
to the ordinary shareholders of the reporting entity, and the
weighted average number of outstanding ordinary shares, for
the effects of all the dilutive potential ordinary shares. The
Standard will apply to financial statements for periods
beginning on or after January 1, 2006. The provisions of the
Standard are to be implemented retroactively for comparative
earnings per share data for prior periods.
F-33
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
AD. Impact of new accounting standards prior to their application
(cont'd)
(4) In January 2006, the IASB published Accounting Standard No.
25, "Revenues" ("the Standard"). The Standard provides the
required accounting treatment (recognition, measurement,
presentation and disclosure principles) for revenues deriving
from the selling of goods, the rendering of services, and the
use of the entity's assets by others, which generates
interest, royalties and dividends. The Standard prescribes
that the entity will measure its revenues based on the fair
value of the proceeds received and/or the proceeds that the
entity is entitled to receive. The Standard will apply to
financial statements for periods beginning on or after January
1, 2006. An entity that in the past did not present its
revenues according to the requirements of the Standard
regarding the reporting of gross or net revenues, will
implement the requirements of the Standard retroactively with
respect to its revenues for all the reported periods as
comparative figures in the financial statements for periods
beginning from the effective date of the Standard. Assets and
liabilities that are included in the financial statements as
at December 31, 2005 at amounts different from those that
would have been recognized if the provisions of the Standard
had been implemented, will be adjusted as at January 1, 2006
to the amounts that would have been recognized according to
the provisions of this Standard. The effect of adjusting the
asset and liability amounts as at January 1, 2006, will be
recognized as a cumulative effect of change in accounting
method. Other than the aforementioned, the comparative figures
in the financial statements for periods beginning from the
effective date of the Standard will be presented as in the
past. Management is of the opinion that the initial
implementation of the Standard will not have an impact on the
Group's financial statements.
(5) In January 2006, the IASB published an amendment to Accounting
Standard No. 20, "The Accounting Treatment of Goodwill and
Intangible Assets when Purchasing an Investee" ("the
Standard"). In accordance with the Standard, goodwill and
intangible assets with an unlimited useful life, which were
identified at the time of purchasing an investee, will not be
amortized. Instead, an examination of impairment in value
should be performed once a year or more frequently if events
or changes in circumstances indicate that there may have been
impairment in the value of goodwill or of an intangible asset
with an unlimited useful life. The Standard will apply to
financial statements for periods beginning on or after January
1, 2006. The transition date for discontinuing the
amortization of goodwill is January 1, 2006 according to this
Standard. On the day after the transition date, the entity
will examine the impairment in value of goodwill in accordance
with Accounting Standard No. 15. The financial statements for
periods in which this Standard was not implemented will not be
restated.
Note 3 - Information Regarding Certain Investees
A. ECI Telecom Ltd. ("ECI") - an affiliate
1. In November 2003, a valuation of ECI was performed by an
independent appraiser, for the purpose of evaluating the
recoverable amount of Koor's investment in ECI. In accordance
with this appraisal, the Company reversed the impairment loss
that had been created in 2001, based on various indications,
including the valuation of ECI. The reversal of the loss of
NIS 73 million was charged against the capital reserve from
foreign currency translation adjustments (credit), which was
realized when the provision was created.
As at December 31, 2005, the balance of the investment in ECI,
stated by the equity method, is NIS 790 million.
F-34
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
A. ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)
2. On March 9, 2004, the board of directors of ECI resolved to
distribute 7.6 million shares of ECtel (approximately 42% of
the paid-up share capital of ECtel) as a dividend to the
shareholders of ECI. The shares of ECtel were distributed on
May 10, 2004, after all the requisite approvals were
obtained. Prior to the distribution, ECI held 10.5 million
shares of ECtel (approximately 58% of the paid-up share
capital of ECtel). Following the distribution, ECI holds 16%
of the shares of ECtel and Koor directly holds 12.9% of the
shares of ECtel. Furthermore, on December 10, 2005, the
Company purchased additional 2% of the shares of ECtel from
an affiliate, Telrad Networks Ltd. The investment in ECtel is
presented in the financial statements of ECI and of Koor by
the cost method.
3. In February 2005, ECI entered into a preliminary agreement
with ABN Amro Bank ("ABN") to sell the balance of long-term
receivables for the sum of 96 million dollars in cash, plus
potentially a further amount of approximately 3.3 million
dollars. In April 2005, all the approvals for the sale were
obtained and the receivables were sold to ABN. As a result,
during the second quarter of 2005, ECI recognized a net gain
of 10.4 million dollars (excludes weighting the additional
gain resulting from the potential amount). The Company's
equity in this gain is approximately NIS 14 million.
4. On June 3, 2005, ECI acquired 100% of Laurel Networks Inc., a
company incorporated and operating in the U.S., for a cash
payment of 88 million dollars.
5. ECI prepares its financial statements in conformity with U.S.
generally accepted accounting principles. Below is the
adjustment of the net earnings (loss) of ECI as reported in
accordance with U.S. GAAP to net earnings (loss) in accordance
with Israeli GAAP:
For the year ended December 31
-----------------------------------------------------
2005 2004 2003
----------------- --------------- -----------------
US$ thousands US$ thousands US$ thousands
----------------- --------------- -----------------
Net earnings (loss) of ECI as reported
in conformity with U.S. GAAP 39,864 10,153 (71,040)
Adjustments:
Temporary difference in recognizing
revenues due to application of SAB 101 - - (5,905)
Financing income (expenses) - FAS 133 19,226 (8,303) (4,843)
Tax expenses - (1,529) (956)
Amortization of excess cost allocated to
intangible assets (2,726) (1,233) (1,556)
Gain (loss) on marketable securities (212) (1,282) 1,282
Impairment in value of assets - 968 2,452
----------------- --------------- -----------------
Net earnings (loss) of ECI in conformity
with Israeli GAAP 56,152 (1,226) (80,566)
================= =============== =================
F-35
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an
affiliate
1. In January 2004, Koor sold 27 million shares of M-A Industries
for approximately NIS 418 million. The capital gain of NIS 160
million (before tax) is included in "other income (expenses),
net". Additionally, as a result of this sale, Koor realized a
tax asset of NIS 59 million which had been created in 2003,
because of the expectation that carryforward tax losses would
be utilized in the aforesaid sale.
As a result of this sale, and after the realization and
conversion of convertible securities that were issued to the
public and to employees, Koor's holding percentage in the
voting rights of M-A Industries at December 31, 2004 was
38.6%.
Following the sale of the shares in January 2004, as a result
of which Koor's holding percentage in the shares of M-A
Industries fell below 50%, Koor evaluated the existence of
effective control in M-A Industries and the resultant
continuation of the consolidation of M-A Industries in the
financial statements of Koor, beginning from the first quarter
of 2004.
In the opinion of Koor's management, the range of
circumstances that weight Koor's shareholding percentage in
M-A Industries, the broad dispersal of voting rights among the
other shareholders, the low level of shareholding by the other
shareholders, the slim probability of the creation of a block
of votes opposing Koor at shareholder meetings and past
experience related to the attendance at shareholder meetings,
as well as the voting percentages and opposition at the
meetings - showed that the economic substance that stood and
continued to stand at the basis of the relationship between
the Company and M-A Industries immediately before and after
the said transactions demonstrated effective control, i.e.,
Koor had the ability to set the financial and operational
policies of M-A Industries.
2. In February 2005, Koor sold 15.9 million shares of M-A
Industries for NIS 374 million. As a result of the sale,
Koor's holding percentage in M-A Industries fell to 34.6%
(fully diluted -28.6%) and Koor recorded a capital gain
amounted to NIS 201 million (before tax), which is included in
the item "other income (expenses), net". Likewise, a tax asset
of NIS 69 million which had been created in 2004, because of
the expectation that carryforward tax losses would be
utilized, was realized as a result of this sale.
Following the sale of shares in February 2005, Koor's
management reevaluated whether to continue to consolidate M-A
Industries in the financial statements of Koor beginning from
the first quarter of 2005.
As a result of the evaluation of the range of existing
circumstances created as a result of the sale, Koor's
management decided that continuing the consolidation of M-A
Industries is not consistent with the economic substance.
Therefore, beginning from the first quarter of 2005, the
consolidation of M-A Industries' financial statements in
Koor's financial statements was ceased, and the investment is
stated by the equity method.
Presented below are balance sheet data of M-A Industries as at:
---------------------------------------------------------------
December 31
2004
---------------
NIS thousands
---------------
Current assets 3,921,252
Non-current assets 4,461,078
Current liabilities 2,672,565
Non-current liabilities 1,913,366
F-36
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate
2. (cont'd)
Presented below are operating results data of M-A Industries:
-------------------------------------------------------------
For the year For the year
ended ended
December 31 December 31
2004 2003
-------------- -------------
NIS thousands NIS thousands
-------------- -------------
<
Revenues 6,895,238 5,191,913
Operating costs and expenses 5,594,734 4,254,429
3. In the current period, 135,650 thousand dollars par value of
debentures of M-A Industries, which had been allotted in
March 2004 in a private placement to institutional investors,
were converted into 29,869 thousand ordinary shares, NIS 1
par value, of M-A Industries. Additionally, NIS 55,412
thousand par value of debentures (Series A) were converted
into 5,687 thousand ordinary shares, NIS 1 par value, of M-A
Industries and 13,380 option warrants (Series 1) of M-A
Industries were exercised for 13,380 thousand ordinary
shares, NIS 1 par value, of M-A Industries. Moreover, 2,752
thousand option warrants issued to employees were exercised
for 1,893 thousand ordinary shares, NIS 1 par value of M-A
Industries in the current period. Consequently, the Company
recorded gains of NIS 79 million during 2005, were included
in "Group's equity in the net earnings of affiliates".
Koor's holdings in the voting rights of M-A Industries as at
December 31, 2005 is 31.5% (fully diluted - 30.0%).
4. On September 28, 2004, M-A Industries entered into an
agreement with Rabobank International for the sale of trade
receivables in a securitization transaction. Under the terms
of the securitization agreement, companies from M-A
Industries Group sold their trade receivables to a foreign
company established for this purpose and which is neither
owned nor controlled by the M-A Industries Group ("the
Purchasing Company"). The purchase of the trade receivables
by the Purchasing Company is financed by an American company
of the Rabobank International Group. This agreement replaces
a previous agreement with Bank of America from 2001, which
was similar in principle to the current agreement.
The maximum amount of financial resources expected to be made
available to the Purchasing Company to purchase the trade
receivables of the companies is 250 million dollars on a
current basis, so that the proceeds received from the
customers whose receivables had been sold will be used to
purchase new trade receivables.
The period in which the companies will sell their trade
receivables to the Purchasing Company will be one year from
the closing date of the transaction. This period may be
extended, with the consent of all the parties, for additional
one-year periods, up to a maximum of four extensions.
M-A Industries will bear all the losses sustained by the
Purchasing Company as a result of the non payment of the trade
receivables included in the securitization transaction up to
the total balance of the subordinated note.
F-37
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate
The accounting treatment of the sale of trade receivables in a
securitization transaction is the recognition of the sale of
the trade receivables only for that part for which the control
and risks were transferred finally and absolutely to the
purchaser. Accordingly, the trade receivable balances included
in the securitization transaction, for which the consideration
of cash and/or non recourse liabilities was received, were
written off. For the part of the trade receivables included in
the securitization transaction which was not recognized as a
sale, a subordinated note was recorded.
A loss from the sale of trade receivables is charged at the
time of sale to the statement of operations.
Under the terms of the agreement, M-A Industries undertook to
meet certain financial covenants, mainly a ratio of
liabilities to capital and profitability ratios. As at the
balance sheet date, M-A Industries is in compliance with the
covenants.
5. In April 2001, the board of directors of M-A Industries
resolved to adopt a dividend policy of distributing 15%-30% of
annual net earnings, subject to the existence of distributable
earnings and to specific resolutions by the board of
directors.
On March 8, 2006, the board of directors of M-A Industries
resolved to change the dividend policy such as beginning in
the fourth quarter of 2005, M-A Industries will distribute
dividends amounting to up to 50% of net earnings for the
period.
In accordance with this policy, a dividend was declared in
2005 in the amount of 59.5 million dollars (of which 12.7
million dollars is in respect of the earnings of 2004). Koor's
share in these dividends amounted to approximately NIS 89
million. Subsequent to the balance sheet date, another
dividend was declared in respect of the earnings of 2005, in
the amount of 23.5 million dollars.
6. Acquisition of companies in 2004:
a. In April 2004, M-A Industries, through wholly-owned
and controlled subsidiaries, signed agreements to
acquire ownership and control in a group of three
companies, Farm Saver.com LLC, Vegetation Management
LLC and Nation Ag II LLC ("the acquired companies"),
which are engaged in the registration, import and
marketing of agrochemicals in the U.S.
The total purchase price amounted to NIS 303 million.
NIS 34.4 million of the total proceed was paid
through a transfer of 1,908 thousand shares of M-A
Industries that had been held by a subsidiary of M-A
Industries.
The excess cost of investment created upon the
acquisition was NIS 235.8 million, of which NIS 130.2
million was allocated to intangible assets (mainly
registration and licenses), NIS 2.3 was allocated to
deferred tax liabilities and NIS 2.7 million was
allocated to inventories. The balance of NIS 105.2
million was allocated to goodwill.
F-38
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate
6. (cont'd)
b. In 2004, M-A Industries, through subsidiaries, signed
agreements for the acquisition of three marketing
companies, as follows:
1) Acquisition of 45% of the rights in a U.S.
company, Control Solutions Inc. ("CSI"),
which is engaged in the marketing of
pesticides to the non-agricultural market in
the United States. The acquisition included
an option for the increase of M-A Industries
shareholding to 60% during 2004-2006 and to
100% from 2009. See also Note 3B(7)(c)
below.
2) Acquisition of all the shares and rights of
Farmoz PTY Limited, an Australian company
engaged in the marketing and distribution of
pesticides in Australia.
3) Acquisition of 50.1% of the shares in a U.S.
company, RiceCo LLC, which is engaged in the
development and marketing of herbicides for
rice.
The aggregate acquisition cost of the marketing
companies was NIS 185.7 million. The excess cost
created as at the acquisition date totalled NIS 140.9
million, of which NIS 68 million was allocated to
intangible assets (mainly registration and licenses),
NIS 15.8 million to deferred tax liabilities, NIS 3.1
million to inventories and the balance of NIS 85.6
million was allocated to goodwill. The statements of
operations and cash flows of the three marketing
companies acquired have been consolidated by M-A
Industries from the respective dates of their
acquisition. The total effect of the first time
consolidation of the aforementioned marketing
companies on M-A Industries consolidated statements
of income from the date of their initial
consolidation is an increase in revenues of NIS 207
million for the period ended December 31, 2004 and a
reduction of net earnings (after goodwill
amortization) of NIS 1 million for that period. The
effect on the consolidated balance sheet as at
December 31, 2004, is an increase of assets in the
amount of NIS 314 million.
7. Acquisition of companies in 2005:
a. In January 2005, M-A Industries, through a wholly
owned and controlled subsidiary, signed an agreement
to acquire 49% of the shares of Makhteshim Agan
Benelux & Nordic B.V. ("MABENO"), which serves as the
exclusive distributor of agrochemicals in the
Benelux, Holland and Scandinavian regions.
Pursuant to the agreement, proceed was paid in the
form of 693 thousand shares of M-A Industries which
were held by a subsidiary of M-A Industries.
Additionally, the subsidiary of M-A Industries was
given an option, exercisable at any time, to increase
its share in MABENO to 55%.
Beginning from 2008, the remaining shareholders in
MABENO have the right to require the subsidiary of
M-A Industries to buy the balance of their shares in
MABENO from them. Beginning from 2013, the subsidiary
of M-A Industries has the right to require the
remaining shareholders in MABENO to sell the balance
of their shares in MABENO to it.
b. In April 2005, M-A Industries, through wholly owned
and controlled subsidiaries, signed an agreement to
acquire 70% of the shares of K.F.T. - Biomark Trading
House, which is engaged in the marketing of
agrochemicals in Hungary.
F-39
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate
7. Acquisition of companies in 2005: (cont'd)
c. In October 2005, the wholly-owned and controlled
subsidiary of M-A Industries exercised its option to
increase its share in CSI, and thereby increased its
share to 60% (see Note 3.B(6)(b)(1)).
The cost to M-A Industries of the three acquisitions,
including the cost of exercising the option to increase the
shareholding of the percentage in CSI ("the acquired
companies") totalled NIS 56.5 million. The excess cost created
as at acquisition date amounted to NIS 65.9 million, of which
NIS 40.3 million was allocated to intangible assets (mainly
registration and licenses), NIS 2.3 million to inventory and
the balance of NIS 23.3 million was allocated to goodwill.
The impact of the first time consolidation of the acquired
companies on M-A Industries consolidated statement of income
is not material.
8. On November 14, 2005, the board of directors of M-A Industries
resolved to adopt a policy, whereby M-A Industries will act to
buy back its shares in the amount of up to 150 million
dollars.
The board of directors' resolution prescribes various
parameters for executing the aforesaid buy back, including
purchase in response to an offer without creation of demand,
limitations on the volume of daily purchases, price criteria
and the execution of off-exchange transactions.
The shares to be purchased will become dormant shares for as
long as they will be held by M-A Industries.
As at the balance sheet date, M-A Industries holds 12,018,603
par value of its shares, representing for 2.6% of its total
issued and paid-up share capital, in the amount of 65.6
million dollars.
C. Telrad Networks Ltd. ("Telrad") - an affiliate
1. In September 2004, Koor and Telrad Holdings Ltd., a
wholly-owned subsidiary of Koor ("the Koor group"), entered
into an agreement for the sale of 39% of the shares of Telrad
to Fortissimo Capital Fund GP L.P. ("Fortissimo").
This sale was executed in two stages.
In the first stage, which was completed in November 2004, the
Koor group transferred 19.5% of Telrad's shares to Fortissimo
for 10.5 million dollars. According to the sale agreement,
Telrad's board of directors shall be comprised of three
directors nominated by Koor, three directors nominated by
Fortissimo and an external expert nominated by mutual
agreement of the parties.
The agreement includes a number of matters, the approval of
which requires mutual agreement of the Koor group and
Fortissimo ("joint control rights"). The agreement included
the granting of Fortissimo with joint control rights, as
Fortissimo is a strategic investor who will assist the Koor
Group with the active management of Telrad and bring about its
recovery. The joint control rights were granted upon
completion of the first stage of the transaction as from the
outset, the intention of the parties was the sale of 39% of
Telrad's shares, and the agreement stipulated that the second
closing would take place within a relatively short period from
the first closing (180 days). These matters include: approval
of Telrad's budget, election of Telrad's executive officers
and the remuneration thereof and the distribution of
dividends. These rights grant Fortissimo (the minority
shareholder) the right to participate actively in significant
decisions relating to Telrad's ordinary course of business and
therefore prevent the Koor group, the majority shareholder,
from having control of Telrad, and require mutual agreement of
Koor and Fortissimo in decisions crucial to Telrad's
operations.
F-40
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Telrad Networks Ltd. ("Telrad") - an affiliate (cont'd)
1. (cont'd)
Therefore, as of the fourth quarter of 2004 and through the
end of the second quarter of 2005, Telrad was proportionately
consolidated in Koor's financial statements according to a
shareholding of 80.5%.
On June 22, 2005 ("the completion date") the Company completed
the second stage of the sale of 19.5% of Telrad's shares,
after certain changes were made to the original agreement.
According to the amendment to the original agreement, the
international investment fund HarbourVest and the Israeli
investment fund Poalim Ventures joined Fortissimo and together
purchased 19.5% of Telrad's shares for 6.25 million dollars.
Furthermore, in the amendment to the agreement, Koor's
obligation to extend an additional loan to Telrad was
cancelled, and Koor was released from certain of the
indemnifications granted to Fortissimo under the original
agreement. Subsequent to the sale, the Koor group's
shareholding in Telrad decreased to 61% and a capital gain of
approximately NIS 4 million was recorded.
The rights granted to Fortissimo under the original agreement
described above, whereby mutual agreement of the Koor group
and Fortissimo is required on significant matters relating to
Telrad's ordinary course of business, are still in effect.
However, due to the presence of two additional shareholders
who are not party to these rights, the proportionate
consolidation of Telrad has been discontinued as of the
completion date. Beginning the end of the second quarter of
2005, Koor's investment in Telrad is presented according to
the equity method.
Below is the balance sheet data of Telrad as included in
Koor's financial statements as at:
December 31,
2004
NIS thousands
----------------
Current assets 295,867
Non-current assets 144,386
Current liabilities 197,173
Long-term liabilities 86,589
Below are the operating results data of Telrad as included
in Koor's financial statements:
Six months
ended For the year ended December 31
June 30 -----------------------------
2005 2004 2003
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
(Unaudited) (Audited) (Audited)
------------- ------------- -------------
Revenues 177,631 470,252 656,019
Operating
costs and
expenses 201,179 531,369 643,109
F-41
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Telrad Networks Ltd. ("Telrad") - an affiliate (cont'd)
2. During 2004, Telrad recorded a valuation allowance in the
amount of NIS 67 million due to changes in the management's
estimation relating to the probability of the realization of
carry forward losses for tax purposes.
3. In 2004, Telrad's board of directors approved a reorganization
plan that included employee layoffs. In the 2005 financial
statements, expenses in the amount of NIS 38 million were
recorded under the item "other income (expenses), net" (in
2004 - NIS 29 million).
4. In November 2005, the board of directors of Telrad resolved to
sell the subsidiary Telrad Connegy Communication Inc.
Therefore, Telrad Connegy was classified as a discontinued
operation in Telrad's financial statements and Telrad recorded
a loss in the amount of NIS 58 million. Koor's share in this
loss was NIS 35 million included in "Group's equity in the
operating results of investee companies, net".
D. Defense Electronics Segment
1. In November 2004, the Company acquired 33% of the shares of
Tadiran Communications Ltd. ("Tadiran Communications")
(approximately 31% taking into consideration options that are
likely to be exercised) from two shareholders for
approximately NIS 637 million (approximately 144 million
dollars). Tadiran Communications develops, manufactures and
markets combat-proven military communications solutions.
The excess cost of the investment created on the acquisition
date amounted to NIS 490 million (approximately 111 million
dollars) of which NIS 288 million was allocated to intangible
assets (trademark, customer base, technology and order
backlog), NIS 20 million was allocated to in-process research
and development and was expensed immediately, NIS 242 was
allocated to goodwill, NIS 98 million was allocated to
deferred tax liabilities and the remaining NIS 38 million was
allocated to various tangible assets and liabilities. The
excess cost was allocated based on the valuation received from
an independent external appraiser.
During 2005, Koor's investment in Tadiran Communications was
sold for a total amount of 146 million dollars and Koor
recorded a capital gain of NIS 72 million. See Note 3D(2).
2. On December 27, 2004, Koor entered into a series of agreements
with Elbit Systems Ltd. ("Elbit") and with Federmann
Enterprises Ltd. ("Federmann"). Under the terms of the
agreements, Koor will sell its entire holdings in Tadiran
Communications to Elbit for 146 million dollars. Concurrently,
Koor will acquire 9.8% of Elbit's share capital from Federmann
for 99 million dollars. The sale of the shares of Tadiran
Communications and the purchase of the Elbit shares will be
executed in two stages, as follows:
In the first stage, which was completed on April 18, 2005,
Koor sold to Elbit 13.8% of the shares of Tadiran
Communications to Elbit for 63 million dollars and
concurrently Koor acquired 5.3% of the shares of Elbit from
Federmann for 53 million dollars. After the closing of the
first stage, Koor is entitled to appoint one director of
Elbit's board, and Elbit is entitled to appoint three of the
members of Tadiran Communications' board of directors.
Pursuant to the original series of agreements, in the second
stage, Koor was, inter alia, to have realized the balance of
its holdings in Tadiran Communications and in Elisra
Electronic Systems Ltd. ("Elisra"), in which Koor had a
holding of 70%.
F-42
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
D. Defense Electronics Segment (cont'd)
2. (cont'd)
On July 6, 2005, the original agreements between Koor and
Federmann and between Koor and Elbit were amended, whereby
Amended Stage 2 and Amended Stage 3 were stipulated. According
to Amended Stage 2, Koor acquired 2.45% of the shares of Elbit
from Federmann for 24.7 million dollars. Koor announced that
as long as it holds Elbit shares it will not invoke its right
to appoint 20% of the Elbit directors and therefore Koor's
investment in Elbit is stated by the cost method.
Additionally, Koor sold to Elbit 5% of the shares of Tadiran
Communications for 23 million dollars and recognized a gain in
the amount of NIS 11 million. After execution of this
transaction, Koor and Elbit acted by virtue of the joint
holdings, so that half of the directors in Tadiran
Communications (other than the external directors) will be
appointed by Koor and half by Elbit.
According to Amended Stage 3 between Koor and Elbit, it was
stipulated that Koor will sell to Elbit 13.2% of the shares in
Tadiran Communications for 60 million dollars, as well as all
of its holdings in Elisra (70%) for 70 million dollars and for
additional consideration contingent on future insurance
receipts in respect of a fire that occurred in the plants of
Elisra's subsidiaries in 2001.
On November 30, 2005, after all the requisite approvals for
closing the sale were received, Stage 3 was closed. The said
sale generated a capital gain to Koor of NIS 148 million in
respect of the sale of Elisra, which was recorded in the
statement of operations in the fourth quarter of 2005.
Moreover, as a result of the sale, the financial statements
were reclassified, such that the operating results of Elisra
and the capital gains generated from its sale were reported as
discontinued operations.
E. Knafaim Arkia Holdings Ltd. ("Knafaim") - former affiliate
During the third and fourth quarters of 2004, the Company sold 19% of
the shares of Knafaim for approximately NIS 144 million. As a result of
the sale, the Company's shareholding in Knafaim decreased from
approximately 28.3% to approximately 9% and the Company recorded a gain
of approximately NIS 51 million. Accordingly, the investment in Knafaim
is stated by the cost method, beginning from the date of the sale.
As management intends to sell the remainder of the shares in Knafaim,
the investment is presented within short-term assets.
F-43
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
F. Koor Corporate Venture Capital ("Koor CVC") - a consolidated
partnership
1. In June 2004, Cisco Systems purchased all the shares of
Riverhead Inc. from its shareholders for consideration of 39
million dollars. As a result, in 2004 Koor CVC recorded a gain
of approximately NIS 17 million.
2. During the current reporting period, Koor CVC's management
estimated that the value of the portfolio investments was
lower than their cost, and therefore decided to write-down the
value of the investments by approximately NIS 64 million (in
2004- NIS 58 million and in 2003 - NIS 72 million).
3. In December 2005, one of Koor CVC's portfolio investments,
Scopus, Video Networks Ltd. raised approximately 31 million
dollars in an IPO. As a result, Koor CVC recorded a gain of
approximately NIS 31 million.
G. Koor Trade Ltd. - a subsidiary designated for sale
During August 2005, a valuation was conducted in respect of an
affiliated company of Koor Trade Ltd., in order to examine the
necessity of writing down the value of the affiliated company in the
financial statements of Koor Trade Ltd. as prescribed by the Israel
Accounting Standards Board Accounting Standard No. 15. The valuation
was performed by an independent external expert and as a result, Koor
Trade Ltd. included a loss from write down of value of approximately
NIS 44 million in the current reporting period.
See Note 24 regarding discontinued operations.
Note 4 - Short-Term Deposits and Investments
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
NIS thousands NIS thousands
-------------------------------- ---------------------------------
Marketable securities (1):
Debentures 208,453 117,110 189,599 117,110
Short-term treasury notes 124,320 119,006 119,528 81,901
Shares and options 155,789 99,630 153,948 99,630
-------------- -------------- -------------- --------------
488,562 335,746 463,075 298,641
Deposits in banks and financial
institutions 52,564 32,913 32,398 -
Short-term loans and current
maturities of long-term loans 33 3,478 - -
-------------- -------------- -------------- --------------
541,159 372,137 495,473 298,641
============== ============== ============== ==============
(1) Presented at market value, except for shares in investees in the amount of NIS 56,609
thousand that are presented according to cost.
F-44
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 5 - Trade Receivables
Consolidated:
December 31
-----------------------------
2005 2004
----------- -----------
NIS thousands
-----------------------------
Open accounts 88,285 1,463,795
Deferred promissory note and receivables from sale of
customers' debts* - 261,004
Post dated checks receivable and credit card companies 3,974 29,920
Current maturities of long-term trade receivables 1,285 4,979
----------- -----------
93,544 1,759,698
=========== ===========
Net of allowance for doubtful accounts 3,692 120,939
=========== ===========
* See Note 3B(4).
Note 6 - Other Receivables
Consolidated Company
----------------------------- -----------------------------
December 31 December 31
----------------------------- -----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
NIS thousands NIS thousands
----------------------------- -----------------------------
Government agencies 3,722 181,867 748 357
Deferred taxes 309 157,442 - 77,483
Accrued income 10,704 30,086 1,190 390
Prepaid expenses 15,030 41,971 3,263 -
Employees 190 6,297 - -
Affiliates - current accounts 24,528 957 4,714 376
Others 33,454 64,830 6,180 5,432
----------- ----------- ----------- -----------
87,937 483,450 16,095 84,038
=========== =========== =========== ===========
Note 7 - Inventories and Work in Progress
Consolidated:
December 31
-----------------------------
2005 2004
----------- -----------
NIS thousands
-----------------------------
Raw and auxiliary materials 66,169 674,525
Goods and work in progress 4,497 157,109
Finished goods 20,243 1,327,025
----------- -----------
90,909 2,158,659
=========== ===========
F-45
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 8 - Investments in Investee companies
A. Consolidated balance sheet - affiliates
December 31
------------------------------
2005 2004
----------- ------------
NIS thousands
------------------------------
Net asset value of the investments (1)(2) 2,520,847 839,741
------------ ----------
Goodwill and original differences:
Original amount 153,997 491,044
Less - accumulated amortization (88,496) (26,859)
------------ ----------
65,501 464,185
------------ ----------
Total investment in share capital 2,586,348 1,303,926
Long-term loans (3) 81,845 22,335
------------ ----------
2,668,193 1,326,261
============ ==========
(1) As follows:
Net asset value of investments as at December 31, 1991 277,159 277,159
Changes from January 1, 1992:
Companies that ceased being consolidated 1,499,387 -
Companies whose operations have been discontinued (43,113) (43,113)
Cost of shares acquired or received 1,462,678 1,427,857
Accumulated losses, net (422,839) (744,819)
Changes in capital reserves and foreign currency
translation adjustments 143,974 (32,626)
Initially consolidated subsidiaries, net 465,193 465,193
Disposals, net (861,592) (509,910)
------------ ----------
2,520,847 839,741
============ ==========
(2) Including investments in companies traded on the Stock
Exchange in Tel Aviv or abroad, in NIS millions:
Carrying value in the balance sheet 2,526 1,275
============ ==========
Market value as at balance sheet date 4,851 1,754
============ ==========
Interest rate
as at December 31
December 31 -----------------------------
2005 2005 2004
---------------- ----------- -----------
% NIS thousands
(3) Linkage terms and interest rates relating to
long-term loans:
Linked to the CPI - without maturity date 6 24,792 22,335
Linked to the Dollar - without maturity date LIBOR* + 2 57,053 -
------------ ----------
81,845 22,335
============ ==========
* As of December 31, 2005, the LIBOR rate is 4.84%.
F-46
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees
December 31
------------------------------
2005 2004
----------- ------------
NIS thousands
Net asset value of the investments 1,653,052 1,729,813
------------ ------------
Goodwill and original differences:
Original amount, net 12,834 556,043
Less - accumulated amortization (3,546) (57,236)
------------ ------------
9,288 498,807
------------ ------------
Book value (1) 1,662,340 2,228,620
Payments on account of shares (1) 60,927 60,927
Long-term loans and capital notes (2) 1,240,583 1,307,998
Non-current accounts (3) 2,515 4,012
------------ ------------
2,966,365 3,601,557
============ ==========
(1) As follows:
Cost of shares including accumulated earnings as at
December 31, 1991 2,032,681 2,032,681
Changes from January 1, 1992:
Cost of acquired shares 7,784,507 7,714,479
Accumulated losses, net (4,368,396) (4,467,604)
Changes in capital reserves and erosion of capital notes, net 175,174 (33,483)
Disposals (3,900,699) (2,956,526)
------------ ------------
Book value, including payments on account of shares (4) 1,723,267 2,289,547
============ ==========
F-47
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
(2) Long-term loans and capital notes:
December 31
------------------------------
2005 2004
----------- ------------
NIS thousands
------------------------------
Long-term loans (a) (b) 52,854 93,476
Capital notes - unlinked and not bearing interest (c) 1,187,729 1,251,902
------------ ------------
1,240,583 1,345,378
Less - current maturities of long-term loans - (37,380)
1,240,583 1,307,998
============ ==========
(a) Long-term loans classified by linkage terms and interest rates:
Interest rate December 31 December 31
at December 31 ------------ -----------
2005 2005 2004
---------------- ------------ ------------
% NIS thousands
---------------- -----------------------------
Linked to the Dollar - - 42,765
Linked to the CPI 2 43,707 41,803
Linked to the CPI No interest 9,147 8,908
------------ ------------
52,854 93,476
============ ==========
(b) The loans mature in the years subsequent to the balance sheet date (excluding current
maturities) as follows:
December 31 December 31
----------- -----------
2005 2004
----------- -----------
NIS thousands
-----------------------------
Second year - -
Third year - -
Fourth year - -
Fifth year - 5,385
Sixth year or thereafter 52,854 50,711
------------ ------------
52,854 56,096
============ ============
(c) Capital notes are not presented at their present value, since their repayment date has not
yet been fixed by the parties.
F-48
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
(3) Non-current inter-company accounts:
December 31
---------------------------
2004 2003
--------- ---------
NIS thousands
---------------------------
Linked to the Dollar 640 599
Unlinked-bears interest at the rate of the increase in the CPI 1,875 3,413
--------- ---------
2,515 4,012
========= =========
(4) Including investments in marketable shares traded on
the Tel Aviv Stock Exchange or abroad in NIS millions:
December 31
---------------------------
2004 2003
--------- ---------
NIS thousands
---------------------------
Carrying value in balance sheet - 754
========= =========
Market value as at balance date - 960
========= =========
Note 9 - Other Investments and Receivables
A. Composition:
Consolidated Company
----------------------------- ------------------------------
December 31 December 31
----------------------------- ------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
NIS thousands NIS thousands
-------------------------------------------------------------------
Deposits in banks and in
financial institutions 13,459 47,278 - 32,028
Non-current trade receivables 3,802 5,229 - -
Long-term loans receivable 24,804 128,877 - -
----------- ----------- ----------- -----------
Total (see B and C below) 42,065 181,384 - 32,028
Other companies -
marketable securities (1) 386,521 33,471 353,001 -
Venture capital investment 114,764 171,207 - -
Non-marketable shares - 1,040 - 1,040
Excess of amounts funded over
amounts accrued for severance
pay (see Note 17) 3,449 5,553 3,449 -
Others 214 108 214 107
----------- ----------- ----------- -----------
547,013 392,763 356,664 33,175
=========== =========== =========== ===========
(1) Market value as at balance
sheet date 411,472 39,485 364,197 -
=========== =========== =========== ===========
F-49
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 9 - Other Investments and Receivables (cont'd)
B. Classification by linkage terms and interest rates of
deposits, non - current debts of customers and long - term
loans receivables:
Consolidated:
Interest rate at December 31
December 31 -------------------------------
2005 2005 2004
---------------- ------------ ------------
% NIS thousands
Linked to the CPI Mainly 5.7 3,802 36,228
Linked to foreign currency (mainly to the dollar) No interest 38,263 121,955
Linked to dollar, interest bearing - 12,757
Unlinked - 10,444
------------ ------------
42,065 181,384
============ ============
Company:
December 31
-------------------------------
2005 2004
------------ ------------
NIS thousands
Linked to the CPI - 32,028
============ ============
C. Repayment schedule of deposits, non-current customer balances
and long-term loans receivable in the years subsequent to the
balance sheet date:
Consolidated Company
----------------------------- ------------------------------
December 31 December 31
----------------------------- ------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
NIS thousands NIS thousands
Second year 12,950 75,680 - 32,028
Third year 8,127 19,957 - -
Fourth year 3,136 13,748 - -
Fifth year 556 3,852 - -
Thereafter and without a
specific maturity date 17,296 68,147 - -
----------- ----------- ----------- -----------
42,065 181,384 - 32,028
=========== =========== =========== ===========
F-50
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 10 - Fixed Assets
A. Consolidated
Land Office
(including Machinery, Vehicles furniture
leasehold equipment and and and
land) Buildings installations forklifts equipment
----------- ----------- ------------- ----------- -----------
NIS thousands
----------------------------------------------------------------------------
Cost as at January 1, 2005 111,951 1,604,382 3,452,659 22,915 169,021
Additions - 52,104 15,343 - 1,574
Disposals - (514) (2,272) - (116
Adjustments resulting from foreign
currency translation differences* - 381 1,406 7 972
Company that ceased being consolidated (80,727) (627,574) (3,084,726) (22,183) (149,562
----------- ----------- ----------- ----------- -----------
Balance as at December 31, 2005 31,224 1,028,779 382,410 739 21,889
=========== =========== =========== =========== ===========
Accumulated depreciation as at
January 1, 2005 1,184 638,625 1,876,732 12,572 114,169
Additions 22 20,851 21,659 9 1,889
Disposals - - (1,456) - (96
Adjustments resulting from foreign
currency translation differences* - 367 969 6 815
Company that ceased being consolidated (1,206) (254,021) (1,591,412) (11,848) (99,935
----------- ----------- ----------- ----------- -----------
Balance as at December 31, 2005 - 405,822 306,492 739 16,842
----------- ----------- ----------- ----------- -----------
Write down for decline in value - (11,707) - - -
----------- ----------- ----------- ----------- -----------
Net book value as at December 31, 2005 31,224 611,250 75,918 - 5,047
=========== =========== =========== =========== ===========
Net book value as at December 31, 2004 110,767 954,050 1,575,927 10,343 54,852
=========== =========== =========== =========== ===========
Tools and
instruments Total
----------- -----------
----------------------------
Cost as at January 1, 2005 3,167 5,364,095
Additions - 69,021
Disposals - (2,902)
Adjustments resulting from foreign
currency translation differences* - 2,766
Company that ceased being consolidated - (3,964,772)
----------- -----------
Balance as at December 31, 2005 3,167 1,468,208
=========== ===========
Accumulated depreciation as at
January 1, 2005 - 2,643,282
Additions - 44,430
Disposals - (1,552)
Adjustments resulting from foreign
currency translation differences* - 2, 157
Company that ceased being consolidated - (1,958,422)
----------- -----------
Balance as at December 31, 2005 - 729,895
----------- -----------
Write down for decline in value - (11,707)
----------- -----------
Net book value as at December 31, 2005 3,167 726,606
=========== ===========
Net book value as at December 31, 2004 3,167 2,709,106
=========== ===========
* See Note 2D
F-51
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 10 - Fixed Assets (cont'd)
A. Consolidated (cont'd)
(1) Certain of the real estate properties have not yet been
registered in the Land Registry Office in the name of the
Group's subsidiaries, primarily due to the absence of formal
parceling in the areas in which the properties are located
Leasehold rights are for a period of 49 years, ended in the
year 2005 and thereafter. Certain leases provide an option for
extension for another 49 years.
The cost of leasehold real estate as at December 31, 2005, is
approximately NIS 547 million, of which approximately NIS 197
million is recorded as capital lease.
(2) Fixed assets are presented after deduction of investment
grants (net of depreciation), which have been received from
the State of Israel by certain subsidiaries under the terms of
the Law for the Encouragement of Capital Investments, 1959.
These grants amount to NIS 113 million and NIS 540 million as
at December 31, 2005 and 2004, respectively (see also Note
16A).
(3) Includes capitalized interest amounting to NIS 55 million and
NIS 137 million at December 31, 2005 and 2004, respectively.
(4) As for amounts charged to cost of fixed assets, see Notes 23B
and 23E.
(5) See Note 22 regarding liens.
(6) See also Note 10B(1).
B. Company
Offices Office
and land Equipment Total
------------- ------------ -------------
NIS thousands NIS thousands NIS thousands
------------- ------------ -------------
Cost as at January 1, 2005 * 36,275 5,793 42,068
Additions 43,729 177 43,906
Disposals - (23) (23)
------------- ------------ -------------
Balance as at December 31, 2005 80,004 5,947 85,951
------------- ------------ -------------
Accumulated depreciation as at January 1, 2005 4,973 2,904 7,877
Additions 3,448 560 4,008
Disposals - (8) (8)
------------- ------------ -------------
Balance as at December 31, 2005 8,421 3,456 11,877
------------- ------------ -------------
Write down for decline in value (11,707) - (11,707)
------------- ------------ -------------
Net book value as at December 31, 2005 59,876 2,491 62,367
Net book value as at December 31, 2004 19,595 2,889 22,484
============= ============ =============
* Represents the ownership of two stories in an office building
in Tel Aviv and leasehold rights to land in Dimona, in an area
of 27 thousand square meters, not yet registered in Koor's
name.
The offices have not as yet been registered in the name of the
Company at the Land Registry Office. The offices are on land
leased under a capital lease for a period of 49 years ending
in 2044.
C. The additions to fixed assets in 2005 include assets held for
sale in 2004 that due to management revoking its intention to
sell the property, were classified as fixed assets in 2005.
F-52
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Intangible Assets, Deferred Tax Assets and Deferred Expenses
A. Consolidated
December 31
-------------------------------
2005 2004
------------ ------------
NIS thousands
-------------------------------
Intangible assets-goodwill:
Original amounts 15,765 808,418
Less - accumulated amortization 14,541 323,666
------------ ------------
1,224 484,752
------------ ------------
Licensing of products abroad:
Original amounts - 1,144,717
Less - accumulated amortization - 474,767
------------ ------------
- 669,950
------------ ------------
Intangible assets in the purchase of products *:
Original amounts - 1,211,508
------------ ------------
Less - accumulated amortization - 177,429
------------ ------------
- 1,034,079
------------ ------------
Marketing rights and others:
Original amounts 16,940 183,494
------------ ------------
Less - accumulated amortization 16,153 66,352
------------ ------------
787 117,142
------------ ------------
Deferred expenses in respect of issuance of debentures
Original amount - 16,069
Less - accumulated amortization - 5,480
------------ ------------
- 10,589
------------ ------------
Deferred tax assets (see Note 16G) 17,450 4,702
------------ ------------
19,461 2,321,214
============ ============
* Including intellectual property rights, trade mark, technological
know-how, etc.
F-53
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Credit from Banks and Others
A. Composition:
Consolidated Company
--------------------------------- ---------------------------------
December 31 December 31
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- ----------------- -------------- -----------------
NIS thousands NIS thousands
--------------------------------- ---------------------------------
Credit from banks (B) 51,862 1,021,000 7,290 181,452
Current maturities of long-term
loans and debentures (Note 15) 220,265 636,200 197,425 538,278
--------------- -------------- -------------- -------------
272,127 1,657,200 204,715 719,730
=============== ============== ============== ============
B. Credit from banks classified by linkage terms and interest rates:
Interest rate Consolidated
at December 31 -------------------------------
2005 December 31
---------------- -------------------------------
2005 2005 2004
---------------- ------------- ----------------
% NIS thousands
---------------- -------------------------------
Linked to foreign currency (mainly to
the Dollar) LIBOR + 1.5 27,618 689,956
Unlinked 5.5-6.75 24,244 331,044
------------ ------------
51,862 1,021,000
============ ============
Interest rate Company
at December 31 -------------------------------
2005 December 31
---------------- -------------------------------
2005 2005 2004
---------------- ------------- ----------------
% NIS thousands
---------------- -------------------------------
Linked to the Dollar - 166,427
Unlinked 5.5 7,290 15,025
------------ ------------
7,290 181,452
============ ============
C. See Note 22 regarding liens to secure credit.
F-54
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 13 - Trade Payables
Consolidated Company
--------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- --------------- -------------- ---------------
NIS thousands NIS thousands
--------------------------------- ---------------------------------
Open debts 80,391 1,550,829 558 379
Cheques and notes payable 11,215 6,693 665 4
--------------- -------------- -------------- -------------
91,606 1,557,522 1,223 383
=============== ============== ============== ============
Note 14 - Other Payables
Consolidated Company
--------------------------------- ---------------------------------
December 31 December 31
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- ---------------- -------------- ---------------
NIS thousands NIS thousands
--------------------------------- ---------------------------------
Employees and
withholdings remitted 21,523 115,774 9,403 3,213
Provision for vacation pay and
vacation expense allowance 11,436 56,835 5,099 4,795
Expenses to be paid 38,404 312,447 15,173 22,932
Government agencies
(including taxes) 46,398 236,317 43,979 1,217
Provision for warranty and repairs
and provision for losses in
respect of long-term contracts 921 7,636 - -
Payables for purchase of assets
and investees - 28,002 - -
Severance pay payable and current
portion of early retirement
pensions (see Note 17) 364 47,874 364 122
Dividend proposed by subsidiary - 29,615 - -
Deferred income 24,427 20,568 - -
Liability in respect of securities
that were sold short - 24,241 - -
Liabilities regarding forward
transaction 1,001 46,388 1,001 4,997
Others 58,815 173,154 20,568 11,856
--------------- -------------- -------------- -------------
203,289 1,098,851 95,587 49,132
=============== ============== ============== ============
Includes interested parties 756 712
============== ============
F-55
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Long Term Liabilities
A. Loans
Consolidated Company
--------------------------------- ---------------------------------
December 31 December 31
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- ----------------- -------------- -----------------
NIS thousands NIS thousands
--------------------------------- ---------------------------------
1. Loans from banks 1,774,414 2,781,636 1,219,470 1,995,835
Less - current maturities 219,265 633,852 197,425 498,270
--------------- -------------- -------------- -------------
1,555,149 2,147,784 1,022,045 1,497,565
--------------- -------------- -------------- -------------
2. Loans and liabilities from others:
Shareholders in subsidiaries 7,691 19,399 - -
Investees - - 6,713 48,133
Receipts from
time-sharing units 34,107 33,053 - -
Others 13,349 61,323 - -
--------------- -------------- -------------- -------------
55,147 113,775 6,713 48,133
Less - current maturities 1,000 2,348 - 40,008
--------------- -------------- -------------- -------------
54,147 111,427 6,713 8,125
--------------- -------------- -------------- -------------
1,609,296 2,259,211 1,028,758 1,505,690
=============== ============== ============== ============
3. Loans classified by linkage terms and interest rates:
Consolidated:
Interest rate at December 31
December 31 -------------------------------
2005 2005 2004
---------------- ------------ ------------
% NIS thousands
---------------- -------------------------------
Linked to the foreign currency
(mainly Dollar) 6.6 - 7.6 253,996 883,059
Linked to the CPI 3.6 - 6.2
(mainly 4.4 - 4.8) 1,359,565 1,368,683
Unlinked Prime* + 0.25% -
Prime* + 0.5% 216,000 643,669
-------------- -------------
1,829,561 2,895,411
Less - current maturities 220,265 636,200
-------------- -------------
1,609,296 2,259,211
============== ============
* Prime interest rate at December 31, 2005 - 6%
F-56
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
A. Loans (cont'd)
Company:
Interest rate at December 31
December 31 -------------------------------
2005 2005 2004
---------------- ------------ ------------
% NIS thousands
---------------- -------------------------------
a. From banks:
Linked to the CPI 4.4 - 6.2 1,210,200 1,256,006
(mainly 4.4 - 4.8)
Linked to the Dollar 7.65 9,270 102,829
Unlinked - 637,000
-------------- ------------
1,219,470 1,995,835
Less - current maturities 197,425 498,270
-------------- ------------
1,022,045 1,497,565
============== ============
December 31
-------------------------------
2005 2004
------------ ------------
NIS thousands
-------------------------------
b. From investees:
Unlinked capital note, non-interest bearing 6,713 8,125
Linked to the CPI - 40,008
-------------- -------------
6,713 48,133
Less - current maturities - 40,008
-------------- -------------
6,713 8,125
============== ============
B. Debentures
1. Presented as long-term liabilities:
Consolidated Company
----------------------- -------------------------
December 31 December 31
----------------------- -------------------------
2005 2004 2005 2004
========== ========= ========= ========
NIS thousands NIS thousands
----------------------- ------------------------
Debentures (1) 390,854 - 390,854 -
========= ========= ========= ========
Debentures convertible into
shares of subsidiary (2)(a) - 646,200 - -
========= ========= ========= ========
F-57
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
B. Debentures (cont'd)
2. Presented between long-term liabilities and shareholders'
equity:
Consolidated
----------------------
December 31
----------------------
2005 2004
------- ---------
NIS thousands
----------------------
Debentures convertible into
shares of subsidiary (2)(b) - 165,091
======= ========
(1) On April 10, 2005, as part of a private placement to Israeli
institutional investors, the Company issued NIS 400 million
par value in debentures, as well as 800,000 options (see Note
20D) for NIS 400 million in cash. The debentures bear annual
interest of 3.75%, linked to the CPI, which is paid on April
30 and October 31 of each year. The debentures are linked to
the CPI and will be repaid in a balloon payment on April 30,
2010. The issue proceeds were allocated to the components of
the package according to the fair value of the securities
issued. Accordingly, the discount in respect of the debentures
amounted to approximately NIS 22 million which will be
amortized as finance expenses over the life of the debentures.
The debentures are presented net of deferred issue costs of
approximately NIS 2.6 million.
(2) a. The debentures were issued by M-A Industries in
a private placement to institutional investors (mainly
overseas). M-A Industries allotted non-marketable
convertible debentures in the amount of 150 million
dollars par value in consideration for their par value.
The debentures are for a 7-year period, linked to the
dollar and bear annual interest at the rate of 1.75%. The
debentures may be converted into ordinary shares of M-A
Industries, of NIS 1 par value each, at a conversion rate
of NIS 20.5 par value, according to a fixed exchange rate
of NIS 4.514 per 1 U.S. dollar. M-A Industries has the
right to force the conversion of the debentures,
beginning March 22, 2007 under certain circumstances.
b. M-A Industries issued NIS 270,000 thousand par value
of debentures (Series A) listed on the Tel Aviv Stock
Exchange, bearing interest at 2.5% p.a. and linked
(principal and interest) to the representative exchange
rate of the Dollar. The debentures are repayable in one
payment in November 2007 if not converted before then
into shares. The debentures are convertible into ordinary
shares of NIS 1 par value each of M-A Industries at the
rate of NIS 9.61 (following distribution of a dividend)
par value of debentures per one ordinary share.
In January 2002 M-A Industries issued NIS 133,980
thousand par value of debentures (Series A) in a private
placement in a total consideration of approximately NIS
129 million. The terms of the debentures are the same as
the terms of the debentures (Series A) issued by M-A
Industries as above.
Beginning from 2003, conversion of the debentures became
probable. Accordingly, in 2004 the balance of the
debentures is stated in a separate item between long-term
liabilities and shareholders' equity.
C. See Note 18A3 regarding the Koor's commitment to comply with
financial covenants.
See Note 22 regarding liens provided in connection with
liabilities.
F-58
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
D.1. Consolidated Liabilities - (net of current maturities) that will mature in the following years subsequent
to balance sheet date are as follows:
Loans from banks Loans from others Debentures
----------------------------- --------------------------- -------------------------------
December 31 December 31 December 31
----------------------------- --------------------------- -------------------------------
2005 2004 2005 2004 2005 2004
------------- ------------- ----------- ------------- -------------- -------------
NIS thousands
-------------------------------------------------------------------------------------------------
Second year 17,061 1,267,441 6,000 16,884 - -
Third year 224,902 581,537 14,691 17,660 - 165,091
Fourth year 124,065 165,094 3,000 12,911 - -
Fifth year 831,965 44,170 1,349 9,046 390,854 -
Sixth year 19,190 18,710 1,000 1,000 - -
Subsequent years 337,966 70,832 28,107 53,926 - 646,200
------------- ------------- ----------- ------------- -------------- -------------
1,555,149 2,147,784 54,147 111,427 390,854 811,291
============= ============= =========== ============= ============== =============
Total
---------------------------------
December 31
---------------------------------
2005 2004
--------------- --------------
NIS thousands
---------------------------------
Second year 23,061 1,284,325
Third year 239,593 764,288
Fourth year 127,065 178,005
Fifth year 1,224,168 53,216
Sixth year 20,190 19,710
Subsequent years 366,073 770,958
-------------- -------------
2,000,150 3,070,502
============== =============
2. The Company Liabilities - (net of current maturities) that will mature in the following years subsequent
to balance sheet date are as follows:
Loans and capital notes
Loans from banks from investees Debentures
--------------------------------- --------------------------- --------------------------------
December 31 December 31 December 31
--------------------------------- --------------------------- --------------------------------
2005 2004 2005 2004 2005 2004
------------- ------------- ----------- ------------- -------------- -------------
NIS thousands
-------------------------------------------------------------------------------------------------
Second year - 1,027,889 - - - -
Third year 100,000 461,000 - - - -
Fourth year 109,270 - - - - -
Fifth year 812,775 8,676 - - 390,854 -
Sixth year - - - - - -
Subsequent years - - 6,713 8,125 - -
------------- ------------- ----------- ------------- -------------- -------------
1,022,045 1,497,565 6,713 8,125 390,854 -
============= ============= =========== ============= ============== =============
Total
--------------------------------
December 31
--------------------------------
2005 2004
--------------- --------------
NIS thousands
--------------------------------
Second year - 1,027,889
Third year 100,000 461,000
Fourth year 109,270 -
Fifth year 1,203,629 8,676
Sixth year - -
Subsequent years 6,713 8,125
--------------- --------------
1,419,612 1,505,690
=============== ==============
3. See Note 22 for details of security pledged to secure loans.
F-59
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 16 - Taxes on Income
A. Tax benefits under the Law for Encouragement of Capital
Investments, 1959
Under this law, by virtue of the "approved enterprise" status granted
to certain enterprises of several investees, these companies are
entitled to various tax benefits. The income derived from these
enterprises during a period of 7 to 10 years, from the year in which
these enterprises first had taxable income (limited to 12 years from
commencement of production or 14 years from the date of the approval,
whichever is earlier), is subject to a corporate tax rate of 0 - 25%.
According to the alternative track, some of the plants of subsidiaries
were granted a tax exemption for a two to four year period and are
taxed at the preferential rate of 25% during the remaining benefits
period.
For fixed assets owned by investees who are approved enterprises, are
entitled to an accelerated amortization deduction.
In the event that an investee distributes a dividend to shareholders
out of income attributable to revenues which received the approved
enterprise tax exemption, the distributing investee will be required to
pay the company tax (25%) it had saved in the period of the benefits.
Deferred taxes in respect of income from approved enterprises were not
provided, since it is the Group's policy not to initiate a distribution
of dividends from its subsidiaries that would result in an additional
tax liability to the Group.
Benefits are conditional upon the fulfillment of terms set out in law
or in deeds of approval. Non-fulfillment of terms could cause
cancellation of the benefit, in whole or in part, and the return of
benefit sums, plus interest and linkage differentials. The investees
met all terms set out as above as at the dates of the financial
reports.
As security for the implementation of the approved projects and
compliance with the conditions of the approval, a pledge has been
registered on the above subsidiaries' assets in favor of the State of
Israel.
B. Measurement of results for tax purposes in accordance with the
Income Tax (Inflationary Adjustments) Law, 1985 (hereinafter -
"the Adjustments Law")
The Company and its subsidiaries in Israel are subject to the Income
Tax Law (Inflationary Adjustments), 1985. Under this Law, the results
for tax purposes are adjusted principally for the changes in the
Consumer Price Index. However, the adjusted income under the tax laws
is not always identical to the reported income according to the
accounting standards of the IASB. As a result, there are differences
between the earnings reported according to financial statements and the
adjusted income for tax purposes.
See Note 2S(2) and Note 16G regarding deferred taxes on such
differences.
F-60
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
C. Law for the Encouragement of Industry (Taxation), 1969:
Certain companies qualify as "industrial companies" under the above
law. By virtue of this status and certain regulations published under
the inflationary adjustments law, the companies are entitled to claim,
and have claimed, accelerated rates of depreciation.
D. Tax rates applicable to income from other sources:
Income not eligible for "approved enterprise" benefits, is subject to
tax at the statutory tax rate of 34% (or if the investee is registered
and operates outside of Israel, at the tax rate prescribed for that
territory).
E. Losses for tax purposes carried forward to future years and
tax assessments:
1. The consolidated balance of carryforward tax losses as at
December 31, 2005 amounted to approximately NIS 2,071 million,
of which NIS 1,527 million relates to Koor. Carryforward tax
losses are linked to the CPI, according to the Adjustments
Law.
2. The Company has received final assessments up to and including
the year ended 2002. Subsidiaries have received final
assessments up to and including the year ended 2003.
F. Amendment to the Income Tax Ordinance
1. On June 29, 2004, the Knesset passed the "Law for the
Amendment of the Income Tax Ordinance (No. 147 and Temporary
Order) - 2004 (hereinafter - the Amendment). The amendment
provides for a gradual reduction in the company tax rate from
36% to 30% in the following manner: in 2004 the tax rate will
be 35%, in 2005 the tax rate will be 34%, in 2006 the tax rate
will be 32% and from 2007 onward the tax rate will be 30%.
Current taxes and deferred tax balances as at December 31,
2004 were calculated based on the new tax rates prescribed in
the Amendment. The effect of the change in the consolidated
financial statements as at the beginning of 2004 is a decrease
in income tax expenses of NIS 5 million.
2. On July 25, 2005 the Israeli Knesset passed the Law for the
Amendment of the Income Tax Ordinance (No.147 and Temporary
Order) - 2005 (hereinafter - the Amendment). The Amendment
provides for a gradual reduction in the statutory company tax
rate in the following manner: in 2006 the tax rate will be
31%, in 2007 the tax rate will be 29%, in 2008 the tax rate
will be 27%, in 2009 the tax rate will be 26% and from 2010
onward the tax rate will be 25%. Furthermore, as from 2010,
upon reduction of the company tax rate to 25%, real capital
gains will be subject to tax of 25%.
The current taxes and deferred tax balances at December 31,
2005 are calculated in accordance with the new a tax rates
specified in the Amendment. The effect of the change in the
new tax rate on the Company's equity was approximately NIS 8
million.
F-61
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
G. Deferred taxes:
1. Deferred taxes are presented in the consolidated balance sheet
as follows:
December 31
-----------------------------
2005 2004
------------ -----------
NIS thousands
Within current assets:
Provision for vacation pay and severance benefits 276 4,527
Operating loss and capital loss carried forwards (2) - 87,665
Inventory, net of customer advances (74) 65,994
Timing differences in respect of recognition of
income and expenses, net 107 (744)
---------- ----------
309 157,442
---------- ----------
Within long-term assets:
Depreciation (16,403) (21,162)
Operating loss and capital loss carried forwards 536,494 691,275
Liability in respect of employee severance benefits 1,837 1,614
Timing differences in respect of recognition of income
and expenses, net 184 (437)
---------- ----------
522,112 671,290
Balance not expected to be realized (1) (504,662) (666,588)
--------- ----------
17,450 4,702
========== ==========
Within long-term liabilities:
Depreciation (78) (368,424)
Operating loss and capital loss carried forwards - 81,115
Inventories, net of customer advances - 9,934
Liability in respect of employee severance benefits - 45,049
Timing differences in respect of recognition of income
and expenses, net - (1,805)
---------- ----------
(78) (234,131)
========== ==========
(1) The Company and certain subsidiaries have deferred
tax assets, that are not expected to be realized,
because of accumulated tax loss carryforwards and
other timing differences. The managements of the
companies believe it is not likely that these
balances will be realized and, accordingly, no
deferred taxes were created in respect thereof.
(2) The Company's balances at December 31, 2004 - see
Note 3B(2).
F-62
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
G. Deferred taxes (cont'd):
2. Balances and movement of deferred taxes in the consolidated
balance sheet:
Timing
differences
in
Inventories Provisions Losses and respect of
Depreciable net of for deductions recognition
fixed customer employee carried of income
assets advances rights forward and expenses Total
---------- ---------- ---------- ---------- ------------ ----------
NIS thousands
------------------------------------------------------------------------------------------
Balance as at
January 1 2004 (391,165) 919 78,289 271,566 27,675 (12,716)
Translation
differences in
subsidiaries 7,943 (11) (791) (4,088) (206) 2,847
Adjustments to
changes in tax rate 19,202 (93) (918) (9,704) (3,404) 5,083
Amounts charged
to statement of
operations (7,827) 75,113 (25,390) (60,844) (27,051) (45,999)
Other differences,
net* (17,739) - - (3,463) - (21,202)
---------- ---------- ---------- ---------- ---------- ----------
Balance as at
December 31, 2004 (389,586) 75,928 51,190 193,467 (2,986) (71,987)
Translation
differences in
subsidiaries 124 - - 554 18 696
Amounts charged to
statement of
operations 4,371 (117) 323 (76,615) 248 (71,790)
Other differences,
net * 368,610 (75,885) (49,400) (85,574) 3,011 160,762
---------- ---------- ---------- ---------- ---------- ----------
Balances as at
December 31, 2005 (16,481) (74) 2,113 31,832 291 17,681
========== ========== ========== ========== ========== ==========
* Mainly subsidiaries that were sold/acquired, net.
Deferred taxes were computed at tax rates of 22% - 35%.
F-63
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
H. Taxes on income included in consolidated statements of
operations:
1. Composition of income tax on continuing operations:
Year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------ -------------
NIS thousands
--------------------------------------------------
Current taxes 5,854 236,160 107,483
Deferred taxes 71,790 40,643 (30,140)
In respect of previous years, net 3,057 (4,473) 16,510
------------- ------------ -------------
80,701 272,330 93,853
============= ============ =============
2. Below is the adjustment between the theoretical tax amount which would have been applicable if all the
income of Koor Group and the consolidated companies were taxable at the statutory tax rate effective in
Israel at that time, and the tax amount charged in the statement of income.
Year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------ -------------
NIS thousands
--------------------------------------------------
Earnings from continuing operations before
taxes on income 337,398 824,053 342,412
============= ============ =============
Statutory tax rate 34% 35% 36%
============= ============ =============
Theoretical tax expenses in respect
of these earnings 114,715 288,419 123,268
Decrease in taxes resulting from
the following factors - the tax effect:
Tax deducted from Koor group's equity in
operating results of investee companies (123,602) 12,271 42,022
Tax benefits under various encouragement laws (6,344) (49,676) (30,132)
Non-deductible expenses for tax purposes 315 15,702 19,561
Losses for which deferred taxes were
not recorded 144,551 115,009 40,492
Provisions for anticipated losses from the
sale of assets, net - - 25,748
Utilization of tax loss carry forwards and
temporary differences from prior years for
which deferred taxes were not created and
which were utilized during the current year (62,428) (18,935) -
Deferred taxes in respect of prior years and
which were written-off at the reporting year 9,951 75,601 -
Tax losses from prior years, for which
deferred taxes were recorded this year - (77,483) (56,912)
Differences between the measurement
basis according to the financial statement
to measurement basis for tax purposes - 11,460 (23,711)
Taxes in respect of prior years 3,057 (4,473) 16,510
Effect of foreign subsidiaries * - (92,839) (62,605)
Others ** 486 (2,726) (388)
------------- ------------ -------------
Total taxes on income 80,701 272,330 93,853
============= ============ =============
* Relates to territories of operations in which the
statutory tax rate is lower than that used in Israel.
** Including influence of changes in tax rate.
F-64
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Liabilities for Employee Severance Benefits, Net
A. Pension, severance pay and retirement grants:
Under current labor laws and existing labor agreements, the companies
in the Group are required to make severance payments, to employees who
are dismissed or who retire.
In respect of these liabilities, regular deposits are made by Group
companies with pension and severance pay funds. The balance sheet
amount represents the unfunded balance of the liabilities. As the funds
deposited are not under the control and management of the Group
companies, the funded amounts are not reflected in the balance sheets.
These deposits and the amount stated in the balance sheet fully cover
the Group's liability for employee severance benefits.
Employees dismissed before reaching retirement age are entitled to
severance pay, computed on the basis of their latest salary. In certain
affiliates, the amounts accumulated in the pension funds are
insufficient to cover such severance pay, the companies will make up
the amount of the shortfall at the time of payment. In such companies,
past experience indicates that the majority of the employees who
continue to work until retirement age, and these companies were not
required to make up amounts of the shortfall to employees who ceased
being employed before retirement age. Therefore, the management of
these companies believes that the probability to make up the shortfall
is low and thus no provision has been included in the financial
statements of these companies. Investees in which irregular severance
has been planned or agreed upon have recorded provisions to record
their liability for the supplementary amounts.
In January 2004, the Retirement Age Law, 2004 (hereinafter - "the Law")
was enacted. The Law raises the retirement age for men and women. In
the estimation of the Group's management, the Law will not have a
material impact on the Group's recorded liability for early pension in
respect of its employees, beyond the provisions that have been recorded
in respect thereof.
B. Funds for severance pay and retirement grants:
The funds for severance pay and retirement include accrued linkage
differences and interest, and they are deposited in severance pay funds
in banks and insurance companies. Withdrawals of the funded amount is
on fulfillment of the provisions of the Severance Pay Law.
C. Early retirement pension:
Under agreements with certain employees who retired from service, Koor
Group companies have undertaken to make pension payments until they
reach retirement age. The entire liability for such pensions is
included in the accounts on the basis of the present value of future
pension payments, computed at a monthly discount rate of 0.3%-0.4% per
month (3.6% - 5% per annum).
D. Compensation for unutilized sick leave:
A provision for unutilized sick leave, according to agreements, is
included in the accounts in respect of those employees who have reached
the age of 55. Due to the uncertainty as to whether employees who have
not reached that age will be entitled to such compensation (as a result
of utilization of sick leave or early retirement), no provision has
been made. The provision is computed on the basis of the latest salary
for 8 working days in respect of each year during which the sick leave
was not utilized.
F-65
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Liabilities for Employee Severance Benefits, Net (cont'd)
E. Liabilities for severance benefits, which are presented in the
balance sheet, and the amount funded in severance pay funds,
are as follows:
Consolidated Company
--------------------------------- ---------------------------------
December 31 December 31
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- ------------
NIS thousands NIS thousands
--------------------------------- ---------------------------------
Severance pay and retirement grants 10,580 149,573 6,030 6,903
Amount accrued for
early retirement 1,602 136,233 1,602 575
Amount accrued in respect of
unutilized sick leave - 14,177 - 362
-------------- -------------- -------------- ------------
12,182 299,983 7,632 7,840
Less - amount funded 11,771 152,995 11,081 2,865
-------------- -------------- -------------- ------------
411 146,988 (3,449) 4,975
Classification of excess of amount
funded over amount accrued
(see Note 9) 3,449 5,553 3,449 -
-------------- -------------- -------------- ------------
3,860 152,541 - 4,975
=============== ============== ============== ============
Note 18 - Contingent Liabilities and Commitments
A. Contingent liabilities
1. The Company:
a. On September 21, 2004 a suit was filed with the Tel
Aviv District Court against the Company, Bezeq - the
Israel Telecommunications Company Ltd. ("Bezeq"), Tadiran
Ltd. (a subsidiary of Koor - "Tadiran"), Tadiran
Telecommunications Ltd. (a former subsidiary of Koor
which was merged with ECI - "Telecommunications"),
Tadiran Public Switching Ltd., (a former subsidiary in
Telecommunications), and Telrad Networks Ltd. (an
affiliate of Koor - "Telrad Networks") in connection with
the public switches. A motion for recognition of the suit
as a class action was filed together with the suit in
accordance with the Anti-Trust Law, 1988 ("the Anti-Trust
Law"), and according to Civil Procedure regulations. In
the Statement of Claim, the plaintiff alleges that during
the previous decade, the defendants had engaged in
activities prohibited by the Anti-Trust Law that resulted
in damages to Bezeq's customers. In respect of the
actions alleged by the Plaintiff, the Plaintiff is asking
for damages for the group that he is seeking to represent
in the amount of NIS 1.7 billion.
F-66
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
1. a. The Company (cont'd):
On March 10, 2005, the Company and the other defendants
submitted to the District Court their clarified objection
to the request of the plaintiff to certify the claim as a
class action. On December 5, 2005 the Plaintiff filed his
response to the said objection.
In the opinion of the management which is based on the
opinion of its legal counsel, the chances of the claim
and of the certify the claim as a class action are
remote.
Further to the sale of shares of Telrad Networks (as
described in Note 3C(1)), Koor committed to indemnify the
purchasers in the event that a court ruling will increase
the amount of expenses to be paid by Telrad Networks to
an amount exceeding that stated in the share purchase
agreement.
b. On June 1, 2005, an indictment was filed with
the Jerusalem District Court prosecuting Koor, and seven
other companies that are not members of the Koor Group
(including two companies that had been owned by Koor on
the relevant dates and were later sold to third parties)
and nine executives (including two who had been salaried
employees of Koor on the relevant dates) for violations
of the Anti-Trust Law. The indictment is the outcome of
an investigation that had been opened by the Anti-Trust
Commission in other companies during 2001, with respect
to price fixing and collusion, and the lack of
competition in the frozen and canned vegetable industry.
The Anti-Trust Authority claims that two companies that
belonged to the Koor Group in the past had colluded with
other companies in the years 1992-1998.
According to the Anti-Trust Law, penalties can be imposed
on those who violate the Law, but the Company believes,
based on its legal counsel, that the said penalties, if
imposed, will not have a material effect on the financial
statements. Moreover, there may be civil implications if
it is possible to prove that damages were caused by the
aforementioned violation. The Company is unable to assess
the implications in the civil law track, if any,
especially due to the fact that in the opinion of the
Company and its legal counsel, for the vast majority of
the period involved, the statute of limitations has
expired.
2. Indemnification in connection with the agreement for the sale
of Elisra in 2002
As part of the agreement for the sale of 30% of Koor's
holdings in Elisra to Elta Electronic Industries Ltd. ("Elta")
in 2002, Koor undertook to indemnify Elta for any amount of
damages that will be sustained as a result of breach of the
representation concerning the insurance indemnity rights to
which the Elisra Group is entitled, relating to the fire that
occurred at Elisra's subsidiaries' plants. Elta's right to
demand payment of the indemnity in this matter carries no time
limit.
3. Pursuant to agreements with the banks, Koor undertook to
maintain certain financial covenants, including a minimum
equity and maximum debt of Koor and certain affiliates, a
ratio of shareholders' equity to debt capital, prohibition
against creating liens without prior consent of the banks and
limitations stipulated in the agreement. Additionally, Koor
undertook, under certain circumstances to repay part of the
existing debt by using the proceeds to be received from the
divestiture of certain assets, if sold.
As at balance sheet date, Koor is in compliance with these
conditions.
F-67
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
4. Tadiran and its investees
Employees of a Tadiran plant that closed during 1990 filed
actions against Tadiran, alleging that they sustained injuries
or certain work-related illnesses resulting from alleged
exposure to certain substances.
Tadiran has insurance policies which, relying on legal
opinions, substantially cover possible damages resulting from
these claims. Therefore, no provisions have been made in
respect of these claims. The financial statements include
provisions in respect of possible damages which had been
covered by an insurance company currently in liquidation.
During 2005 as part of Tadiran's liquidation process,
Tadiran's assets and liabilities, including the said claims,
were transferred to Koor.
5. M-A Industries and its investees
a) Quality of the environment
The activities of M-A Industries are exposed to the risks
of harming the environment, since it manufactures, stores
and sells chemicals. M-A Industries invests significant
amounts in order to comply with the provisions of
environmental laws and regulations, and in the opinion of
the management, the companies are in compliance with
these provisions. According to M-A Industries' insurance
experts, the insurance policies provide coverage in the
event of a sudden unexpected occurrence of environmental
pollution in Israel and worldwide, subject to the
relevant terms of the policy. As at balance sheet date,
M-A Industries does not have insurance coverage for
continuous environmental pollution. Such insurance is
difficult to obtain, and even where it can be obtained,
the company believes that the terms of the insurance,
including the sum insured, do not at present justify
taking out such insurance.
In accordance with the agreement of the Ministry of the
Environment, the subsidiaries decided to build facilities
for biological treatment of the sewage. Construction of
the facilities will last about 3 years. The management of
M-A Industries estimates the total construction costs at
30-40 million dollars.
One of the plants of M-A Industries subsidiary is located
in Ramat Hovav, along with other chemical plants, since
the Government decided that the geological layers in that
particular area are completely impermeable to seepage or
pollution. The Ministry of the Environment conducted
tests, which determined that there are indications of
subterranean pollution in Ramat Hovav. The investigators
recommended that steps be taken to prevent the
continuation of leakages from active and inactive plants,
which could constitute a source of pollution of the water
table in the area. The subsidiary could be required to
clean the areas or relevant subterranean layers if and
when it is found that it is responsible for the
pollution. In recent years, various tests have been
performed by different institutions for research of
pollutants of the land in the Ramat Hovav area and near
the site of a subsidiary in Beer Sheba.
F-68
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
5. M-A Industries and its investees (cont'd)
a) Quality of the environment (cont'd)
According to the research performed by the investigators,
including foreign research institutes, there is no need
to clean the land, since there is no effective process
for doing so. All there is to do is to prevent
continuation of the pollution and natural cleaning
processes will clean the land for 80 years. In
management's estimation, the subsidiary is not expected
to have a material effect on the financial statements,
due to implementation of the recommendations as a result
of the said testing.
In May 2004, a subsidiary of M-A Industries owning
additional plants at the Ramat Hovav site received notice
of a change in the terms of the license, whereby the
plants must change the method it uses to treat its sewage
from the existing treatment, do so independently and
through the implementation of vaporization processes.
These terms include demands that, within a short period
of time, the plants conduct research and development for
the purpose of customizing the process to the composition
of each plant's sewage, and later, to build a suitable
facility. Additionally, formulation processes are to be
implemented, whereby the plants must present the Ministry
with a research and development program for the purpose
of implementing the process with respect to the sewage.
At the same time, the Ministry of the Environment set the
date by which the plants must treat the sewage in the
requisite format and to stop the flow of sewage into the
Council's vaporization pools and treatment facilities.
On October 10, 2004, a subsidiary of M-A Industries,
together with the Israel Manufacturers Association and
other companies, filed an administrative appeal with the
Beer Sheba District Court against the Ministry of the
Environment. The subject of the appeal is the additional
conditions for obtaining a business license imposed on
the appealing plants in May 2004 which are engaged in the
treatment and discharge of sewage created by their
activities. At the agreement of the parties and with the
approval of the court the dispute was transferred to
mediation proceedings.
In the framework of the mediation, the Ministry of
Environment Protection hired the services of a Dutch
company having expertise with respect to the matter. The
Dutch company's conclusions supported the Company's
position that there is no treatment method of pressurized
ventilation and crystallization for the type of waste
material produced by the Ramat Hovav factories and it
recommended to remain in the Ramat Hovav pools while
improving the quality of the waste material and
preventing the escape of odors and pollution into the
environment. The matter is currently in the mediation
process. Agreement regarding the proposed method will
also update the conditions of the business license
accordingly.
In the estimation of M-A Industries management, based on
its legal counsel, in view of the preliminary stage of
the process, it is not possible at this time to estimate
the prospects of the administrative appeal. In the
estimation of M-A Industries, if the appeal is dismissed,
it will have a material effect on the activities of the
plant in Ramat Hovav and/or will require investments of
amounts that M-A Industries is unable to estimate at this
time.
On November 28, 2004, the Government reached a decision
approving a plan related to reducing air and water
pollution deriving from the "Ramat Hovav" industrial
area.
F-69
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
5. M-A Industries and its investees (cont'd)
a) Quality of the environment (cont'd)
The key points of the plan are:
a. Treatment of the plants' sewage
1. By June 30, 2006, the flow of untreated sewage
to the joint biological treatment facility will
be halted and each plant will treat the sewage
to the quality level prescribed by the Ministry
of the Environment (as derive from the
additional conditions for a business license
from May 2004).
2. By December 31, 2007, the flow of waste water to
the vaporization pools will be halted and each
plant will treat the waste water. To the level
of quality and concentration of salts
prescribed by the Ministry of the Environment
(as derive from the additional conditions for a
business license from May 2004).
b. Rehabilitation of existing vaporization pools
1. On January 1, 2005, the Ramat Hovav Industrial
Council will begin taking action to dry and
rehabilitate the area of the vaporization pools
spanning 1,500 thousand square meters, in an
attempt to complete the drying and
rehabilitation activities by not later than the
end of 2012.
2. The Ramat Hovav Industrial Council will submit
a detailed plan and timetable for drying and
rehabilitating the vaporization pools site to
the Ministry of the Environment for approval by
December 31, 2004.
c. Treatment of air pollution
The Ministry of the Environment will formulate and
operate a plan to prevent exceptional emission of
hazardous materials into the air from the Ramat
Hovav industrial area.
As to the possible implications of the Government's
decision on the activities of M-A Industries, see
above.
In addition, a criminal complaint was filed against
M-A Industries and one of its executives by the Man,
Nature and Law Foundation. The complaint accuses M-A
Industries that in several instances during
1999-2002, there were measurements at its Ramat
Hovav plant of chimney emissions of materials at
prohibited concentrations, which created strong air
pollution. M-A Industries does not admit to the
charges in the complaint. In the opinion of M-A
Industries and its legal counsel, because of the
early stage of the proceedings, it is not possible
to estimate the outcome of the complaints. However,
according to the accepted penalty standards, there
is high probability that if M-A Industries is
convicted, there will not be a material impact on
M-A Industries, therefore no provision has been
recorded in the financial statement.
F-70
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
5. M-A Industries and its investees (cont'd)
b) In 1995, a claim was filed against a subsidiary of
M-A Industries and several other defendants, totaling
approximately 45 million dollars, by a group that had
acquired the rights of two banks which declared
bankruptcy. The subsidiary is being sued as the guarantor
of debts of agricultural cooperatives that were its
former shareholders. The position of the subsidiary is
that it was removed from the guarantee agreement under
the terms of a subsequent agreement between the bank, the
previous shareholders and a subsidiary of the former
shareholders. The subsidiary's financial statements
include a provision of 1.6 million dollars, based on the
possibility of a compromise agreement with the
plaintiffs. In the estimation of the subsidiary, based on
the opinion of its legal counsel, the provision recorded
is sufficient to cover any possible loss from this claim.
c) Administrative proceedings, civil actions and other
monetary claims of approximately 64 million dollars have
been filed against a subsidiary of M-A Industries. Based
on the opinion of its legal counsel, the subsidiary's
management estimates that the chances of the subsidiary's
success in the proceedings and its defense against the
above claims and demands are high. The subsidiary
believes that the provisions recorded in its financial
statements are adequate to cover any possible damage
which may result from these claims.
d) In April 2005, M-A Industries received notice from an
international chemicals company that it had opened
international arbitration proceedings against M-A
Industries relating to a licensing and supply agreement
that was signed in 1998. The amount of the claim
according to the notice is 10.6 million dollars. M-A
Industries recorded an adequate proper provision in its
books, based on the opinion of its legal counsel.
f) On the matter of undertakings in securitization
transactions and financial covenants in respect of those
transaction, see Note 3B4.
6. ECI Telecom Ltd. ("ECI")
In January 2005, ECI was named one of the defendants in a
purported class action complaint filed in the United States
against ECtel, certain directors and officers of ECtel, and
against ECI. The complaint alleges violations of U.S. Federal
Securities laws by ECtel and breach of fiduciary duties by the
directors and officers of ECtel, in connection with disclosure
of ECtel's financial results, between April 2001 and April
2003. It also alleges that ECI was the controlling shareholder
of ECtel during this period and, as such, influenced and
controlled the acts and omissions of ECtel. Damages claimed by
the plaintiff have not yet been quantified. ECI's management,
based on the advice of its legal counsel, believes that the
allegations made in the complaint with respect to it are
without merit, therefore no provision has been recorded in the
financial statements in respect thereof.
F-71
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
7. A number of claims have been filed against the Company and
certain investees concerning various matters arising in the
normal course of business, including litigation with tax,
customs and VAT authorities, which are in various legal
proceedings. In the estimation of the managements of these
companies, based on the opinions of their legal counsel, the
provisions for these claims included in their financial
statements, are adequate in light of the circumstances.
8. On fulfillment of conditions relating to an investment grant -
see Note 16A.
9. On the indemnity granted to Claridge as advisor - see Note
26B(2).
10. Stamps duty
In Israel, the Stamp Duty on Documents Law, 1961 ("the Law")
was applicable to various documents at different rates,
depending on the kind of document and the amount stipulated
therein, or not stipulated therein. In June 2003, the wording
of Section 15.A of the Law was amended, prescribing who is
obligated for stamp duty.
As of June 2003, the tax authorities notified of their
intention to intensify their activities for enforcement of the
law.
The Company and certain investee companies received requests
from the Tax Authorities to produce documents, as well as
various notifications to make payment. The law was nullified
on December 22, 2005, effective from January 1, 2006. In the
estimation of the managements of the Company and the
investees, based on the opinions of their legal counsel, the
companies are not expected to have material exposure related
to the Stamp Duty Law.
11. The liability of directors and officers in the Company and in
investee companies is insured by Clal Insurance Company Ltd.,
a member of the IDB Group, which is an interested party, in
directors and officers (D&O) insurance, subject to the terms
of the insurance policy. Additionally, in accordance with a
resolution by the general meeting of the Company's
shareholders, the Company resolved to indemnify its directors
and officers against various events that the insurance does
not cover, and in monetary amounts exceeding the insured
amounts, all as provided in the said resolution.
B. Commitments
1. Several companies in the Group have research and development
contracts with the Government of Israel. Under these
contracts, the companies are required to pay royalties to the
Government of Israel if they generate income from such
research (at rates of 2% - 5% of sales proceeds from products
resulting from the research and development), in amounts not
exceeding 100% - 150% of the amounts of the grants, linked to
the dollar, received by the companies as participation in the
research and development projects.
Royalty expenses paid to the Government of Israel in respect
of these research and development contracts, are as follows:
In the year ended December 31, 2005 - NIS 2,919 thousand.
In the year ended December 31, 2004 - NIS 29,758 thousand
(mainly M-A Industries). In the year ended December 31, 2003 -
NIS 22,902 thousand (mainly M-A Industries).
F-72
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
B. Commitments (cont'd)
2. Certain subsidiaries have undertaken to pay royalties at the
rate of 3% per year in respect of the incremental export
sales, up to the amount financed by the Fund for the
Encouragement of Marketing Abroad. Such amounts are linked to
the exchange rate of the dollar.
3. At December 31, 2005, the Company and subsidiaries were not
committed for the purchase of fixed assets (31.12.2004 - NIS
22 million).
4. Certain companies in the Group lease and rent industrial and
office premises under long-term contracts. The lease contracts
are non-cancelable and in most cases include renewal options.
The expenses of these companies were NIS 11 million in 2005,
(NIS 43 million in 2004, NIS 50 million in 2003).
Future minimum payments under the non-cancelable operating
leases and rental fees for the years subsequent to balance
sheet date, are as follows:
December 31
2005
----------------
(NIS thousands)
----------------
First year 12,235
Second year 2,704
Third year 2,577
Fourth year 151
Fifth year and thereafter 132
17,799
================
5. Koor Corporate Venture Capital's commitment for additional
investments in venture capital funds as at December 31, 2005
is approximately 2.3 million dollars.
Note 19 - Convertible Securities of Investee Companies
Option warrants to employees:
Certain investees issued options to their employees. Employee
entitlement to such options is usually accrued over a number of years
from their date of issue, subject to continued employment. The exercise
term of the options varies according to the terms of the different
plans.
Convertible debentures and options
See Note 15B.
At each reporting date, Koor reviews the probability that the
convertible securities will be exercised. If a loss, as a result of
dilution, following the convertible securities exercise, is expected,
the Company records the loss.
F-73
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options
A. Share capital is composed as follows:
December 31, 2005 December 31, 2004
-------------------------------- --------------------------------
Authorized Issued and Authorized Issued and
Outstanding outstanding
-------------- ------------ ------------ -------------
Number of shares:
Ordinary shares, par value
of NIS 0.001 (1) (3) (4) 83,932,757 16,162,467 83,932,757 16,033,213
============== ============ ============ =============
Deferred shares, par value
of NIS 0.001 (2) 15,792,243 15,156,533 15,792,243 15,156,533
============== ============ ============ =============
Amount in nominal NIS:
Ordinary shares, par value
of NIS 0.001 83,933 16,162 83,933 16,033
============== ============ ============ =============
Deferred shares, par value
of NIS 0.001 15,792 15,157 15,792 15,157
============== ============ ============ =============
(1) These shares are listed on the Tel Aviv Stock Exchange (TASE).
On December 29, 2005, the share price on the TASE was NIS
252.80.
The ADS (American Depository Shares) of the Company, each of
which represents 0.2 ordinary shares, par value of NIS 0.001
("Ordinary Shares"), are traded on the New York Stock Exchange
(NYSE). The ADS price on the NYSE on December 30, 2005 was
10.99 dollars.
(2) The holders of the deferred shares are entitled to recovery of
paid up capital upon liquidation in its nominal amount, after
payment of the nominal amount to the holders of the Ordinary
Shares. The holders of the deferred shares do not have voting
rights, and they are not entitled to participate in a dividend
distribution of any kind.
(3) On the balance sheet date, subsidiaries hold 15,799 Ordinary
Shares of Koor. (4) During 2005, options in the employee stock
option plans (See C above) were exercised for 129,254 ordinary
shares.
B. Buy-back of Company shares
In 2000, the Company purchased 538,592 ordinary shares (approximately
3.4% of the ordinary share capital), at a cost of approximately NIS 219
million. This amount was deducted from the shareholders' equity of the
Company.
On December 31, 2001, the Company purchased 154,637 of its ordinary
shares from a subsidiary.
F-74
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
B. Buy-back of Company shares (cont'd)
On May 27, 2003, a foreign institutional investor (hereinafter - "the
Buyer") purchased 500,000 of the aforementioned Company shares. The
Purchaser declared that the sale was effected without his requesting or
receiving any information from the Company, and undertook not to trade
the shares to be purchased within a specified period. The sale was
effected on that day in an off-market transaction, at the market price,
for total consideration of approximately NIS 43 million. On April 15,
2005, the Company sold to the foreign institutional investor 193,229
shares of the Company it had held, in an off-market transaction for
consideration of approximately NIS 50 million.
As at the balance sheet date, the Company had sold all of its holdings
in its shares. The total holdings of subsidiaries in Koor's shares is
15,799 ordinary shares, and the amount deducted from shareholders'
equity for the shares held is NIS 6,071 thousand.
C. Stock options to senior employees
1. 1998 and 2000 plans:
During 1998 and 2000 stock option plans were approved with the
following main points:
1. A total framework was approved for the allotment of
800,000 stock options theoretically exercisable for up to
800,000 ordinary shares of the Company.
2. The options are designated for Company employees who are
not related parties in the Company and will not become
related parties in the Company as a result of allotment
of the stock options.
3. Most of the options allotted under these plans were
exercised by the balance sheet date.
4. The balance of options outstanding at December 31, 2005:
Balance of
stock option Exercise Exercise
Year Plan not exercised price date
--------- ------------- --------- ---------
NIS
---------
1998 670 101.38 06/2006
2000 1,734 101.38 06/2007
2. 2003 Plan:
On July 27, 2003, a general meeting of shareholders approved
Stock Option Plan 2003, which had been approved previously by
the Audit Committee and by the Board of Directors, on May 25,
2003 and June 5, 2003, respectively. The key points of the
Plan are:
1) A total framework was approved for the allotment of
1,200,000 stock options, theoretically exercisable for up
to 1,200,000 ordinary shares of the Company, i.e. about
6.8% of the ordinary shares (fully diluted) of the
Company.
F-75
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees (cont'd)
2) The options allotted to the trustee will be exercised for
shares in a quantity reflecting the amount of the
financial benefit inherent in the options, according to
the Benefit Component Method. Under the terms of the
Plan, each stock option is theoretically exercisable for
one share, subject to adjustments. However, in practice,
offerees who exercise the options will not be allotted
the full quantity of shares underlying each option, but
only shares which reflect the amount of the financial
benefit inherent in their option, computed on the date of
exercise. Accordingly, the exercise price of each stock
option is intended only for computation of the benefit
component.
3) The exercise price of every option will be NIS 96 linked
to the CPI, unless the Company decides to prescribe a
higher exercise price for options that will be allotted
on dates subsequent to the approval date of the plan.
4) The options are designated for Company employees who are
not related parties in the Company and will not become
related parties in the Company as a result of allotment
of the stock options. In any event, the total number of
offerees under Plan 2003 will not exceed 35 offerees.
5) The right of every offeree to exercise the options for
shares will vest in six stages during the three-year
period from the record date, whereby at the end of every
calendar half-year, one-sixth of the number of options
allotted to the trustee on his behalf will vest.
6) Options not exercised by December 31, 2010 will expire.
7) The Plan will be taxed under the Capital Gains Track,
under the provisions of Section 102 of the Income Tax
Ordinance and the regulations promulgated hereunder. Any
tax to be imposed in respect of the exercise of the
options will be borne solely by the offerees. The Company
will be unable to claim any tax deduction for the
expense.
8) Also approved within the framework of the approval of
Plan 2003 was the granting of 350,000 options out of the
total number, to seven directors (except for two
directors who are controlling shareholders in the
Company, directly or indirectly), divided equally, as
well as 175,000 options to the Company's CEO. The balance
of the options is intended for other employees and
officers of the Koor Group.
F-76
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees (cont'd)
9) The balance of options outstanding as at December 31, 2005:
Balance of
stock option Exercise Exercise
not exercised price date
------------- ------------ -----------
NIS
------------
722,648 96.00 12/2010
20,000 175.95 12/2010
50,000 186.20 12/2010
40,000 200.00 12/2010
10,000 209.69 12/2010
10,000 225.00 12/2010
-------------
852,648
=============
3. Changes in the options in respect of all stock option plans
during 2005:
1997 Plan 1998 Plan 2000 Plan 2003 Plan Total
--------- --------- --------- --------- ---------
Balance as at
beginning of year 5,519 53,263 31,734 939,450 1,029,966
Granted - - - 60,000 60,000
Exercised (5,519) (52,593) (30,000) (146,802) *(234,914)
========= ========= ========= ========= =========
Balance as at end
of the year - 670 1,734 852,648 855,052
========= ========= ========= ========= =========
* Because of the "Benefit Component Method", a total of 129,254
ordinary shares of the Company were issued.
D. Option warrants to institutional investors
In the framework of a private placement to Israeli
institutional investors, as described in Note 15B(1), 800,000
option warrants were issued on April 10, 2005. Each option
warrant is exercisable until April 30, 2010 into one share of
the Company of a par value of NIS 0.001 for an exercise price
of NIS 300 linked to the CPI. The Company intends to register
the underlying shares for trading on the Tel Aviv Stock
Exchange.
F-77
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances
A. Derivative financial instruments
The Company has entered into forward transactions, in order to reduce
the overall exposure of its CPI-linked debt. As at December 31, 2005,
the Company had open CPI-NIS forward contracts in the amount of NIS 200
million.
Furthermore, the Company entered into an interest rate swap (IRS) in
the amount of 50 million dollars, in order to reduce its exposure to
fluctuations in interest rates. In the transaction, variable interest
was exchanged for fixed interest.
B. Fair value of financial instruments:
The carrying amounts of cash and cash equivalents, short-term
investment, trade receivables, other accounts receivable, credits from
banks and others, trade payables and other accounts payable, debentures
and convertible debentures derivatives and other financial instruments
is approximate or similar to at their fair value. With respect to the
market value of certain affiliated and other companies whose shares are
traded on the stock exchange, see Notes 8A(2) and 9.
C. Credit risk of trade receivables:
NIS millions
------------
Condensed data of credit risk of trade
receivables as at December 31, 2005:
Receivables insured by credit card companies 3
Receivables - Government authorities 3
Other receivables, including checks and c
redit card companies 91
------------
Total (including non-current receivables) 97
============
In Management's opinion, the financial statements include suitable
provisions in respect of exposure to doubtful debts.
The exposure to credit risks relating to trade receivables is limited,
due to the relatively large number of customers.
F-78
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances:
(1) Consolidated
December 31, 2005
---------------------------------------------------------------------------------
In foreign Linked Unlinked Total In foreign
currency or to the currency or
linked thereto CPI linked thereto
-------------- -------- -------- ------- --------------
NIS thousands
Assets
Cash and cash equivalents 33,725 - 285,073 318,798 229,946
Short-term deposits and investments 91,549 186,931 106,890 385,370 86,387
Trade receivables 52,337 1,285 39,922 93,544 1,640,819
Other accounts receivable 36,412 275 35,911 72,598 170,572
Other investment and receivables 95,587 28,594 100 124,281 119,680
------- ------- ------- ------- ---------
309,610 217,085 467,896 994,591 2,247,404
======= ======= ======= ======= =========
Liabilities
Credits from banks and others
(not including current maturities
of long-term liabilities) 27,618 - 24,244 51,862 689,956
Trade payables 48,263 - 43,343 91,606 1,347,165
Other accounts payable 53,531 8,086 117,245 178,862 687,826
Long-term loans and debentures
(including current maturities) 215,645 1,788,770 216,000 2,220,415 1,712,562
------- ------- ------- ------- ---------
345,057 1,796,856 400,832 2,542,745 4,437,509
======= ========= ======= ========= =========
December 31, 2004
-------------------------------------------------
Linked Unlinked Total
to the
CPI
-------- -------- -------
NIS thousands
-------------------------------------------------
Assets
Cash and cash equivalents - 61,353 291,299
Short-term deposits and investments 100,790 85,330 272,507
Trade receivables 1,531 121,211 1,763,561
Other accounts receivable 17,211 99,585 287,368
Other investment and receivables 58,562 10,346 188,588
------- ------- ---------
178,094 377,825 2,803,323
======= ======= =========
Liabilities
Credits from banks and others
(not including current maturities
of long-term liabilities) - 331,044 1,021,000
Trade payables - 227,942 1,575,107
Other accounts payable 39,648 328,691 1,056,165
Long-term loans and debentures
(including current maturities) 1,368,683 685,471 3,766,716
--------- --------- ---------
1,408,331 1,573,148 7,418,988
========= ========= =========
F-79
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances (cont'd):
(2) Company
December 31, 2005
---------------------------------------------------------------------------------
In foreign Linked Unlinked Total In foreign
currency or to the currency or
linked thereto CPI linked thereto
-------------- ---------- ---------- --------- --------------
NIS thousands
---------------------------------------------------------------------------------
Assets
------
Cash and cash equivalents 740 - 266,222 266,962 2,547
Short-term deposits and
investments 79,995 179,358 82,172 341,525 51,909
Other receivables 2,865 - 12,573 15,438 1,121
Short term loans to
investee companies - 37,212 - 37,212 -
Other investments and receivables 114 - - 114 107
Investments and other long-term
receivables:
Investee companies (including
current maturities of loans) 640 52,854 1,189,604 1,243,098 43,364
------------ ---------- ---------- ---------- ------------
84,354 269,424 1,550,571 1,904,349 99,048
============ ========== ========== ========== ===========
Liabilities
-----------
Credits from banks and others
(not including current maturities
of long-term liabilities) - - 7,290 7,290 166,427
Trade payables 10 - 1,213 1,223 43
Other accounts payable 12,837 5,955 76,795 95,587 18,864
Long-term liabilities (including
current maturities of loans) 9,270 1,601,054 6,713 1,617,037 102,829
------------ ---------- ---------- ---------- ------------
22,117 1,607,009 92,011 1,721,137 288,163
============ ========== ========== ========== ===========
December 31, 2004
------------------------------------------
Linked Unlinked Total
to the
CPI
--------- ---------- ---------
NIS thousands
Assets
------
Cash and cash equivalents - 27,118 29,665
Short-term deposits and
investments 80,235 66,867 199,011
Other receivables - 14,869 15,990
Short term loans to
investee companies 12,548 - 12,548
Other investments and receivables 32,028 - 32,135
Investments and other long-term
receivables:
Investee companies (including
current maturities of loans) 50,711 1,255,315 1,349,390
--------- ---------- ---------
175,522 1,364,169 1,638,739
========= ========== =========
Liabilities
-----------
Credits from banks and others
(not including current maturities
of long-term liabilities) - 15,025 181,452
Trade payables - 340 383
Other accounts payable 17,143 27,436 63,443
Long-term liabilities (including
current maturities of loans) 1,296,014 645,125 2,043,968
--------- ------- ---------
1,313,157 687,926 2,289,246
========= ========= =========
F-80
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 22 - Liens and Guarantees
A. In order to secure some liabilities, certain subsidiaries have
mortgaged their real estate and have placed fixed charges on
plant, equipment and bank deposits, as well as floating
charges on all of their assets. In addition, pledged a portion
of their shares in investee companies.
For additional information regarding assets pledged relating
to fixed asset investment grants, see Note 10A(2)
B. The balances of secured liabilities are as follows:
Consolidated
---------------------------------
December 31
---------------------------------
2005 2004
---------------- --------------
NIS thousands
Credit from banks 16,433 333,113
Loans from banks and others and debentures (including
current maturities), see Note 15, and also C below 539,034 2,017,912
---------------- --------------
555,467 2,351,025
---------------- --------------
C. Guarantees to banks and others for loans and for assuring
credit lines and other guarantees given by the Company in
favor of:
Consolidated Consolidated
------------------------------- -------------------------------
December 31 December 31
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------ -------------- --------------
NIS thousands NIS thousands
------------------------------- -------------------------------
Subsidiaries (1) 260,794 240,151 260,794 240,151
Others 13,640 31,232 40 150
--------------- ------------- -------------- -------------
274,434 271,383 260,834 240,301
=============== ============== ============== ==============
(1) Includes NIS 132 million (NIS 125 million in 2004) that Koor granted to Bezeq in connection with Bezeq's
agreement to transfer ownership of the public switching activities to a third party. (See Note 18A(1)(a))
F-81
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 23 - Data concerning Items in Statements of Operations
A. Revenues from sales and services, net - Consolidated:
Year ended December 31
--------------------------------------------
2005 2004 2003
---------- ---------- ----------
NIS thousands
Local:
------
Industrial operations 24,580 266,785 239,219
Trading operations 291,309 504,676 245,095
Abroad:
-------
Industrial operations - export and
international operations 427,853 6,446,300 5,165,766
Trading operations 244,640 789,852 688,546
------- --------- ---------
Total * 988,382 8,007,613 6,338,626
======= ========= =========
B. Cost of sales and services - consolidated:
Year ended December 31
--------------------------------------------
2005 2004 2003
---------- ---------- ----------
NIS thousands
Industrial operations:
----------------------
Materials 248,829 3,320,256 2,235,687
Labor 96,522 428,622 397,269
Subcontracted work 7,146 41,640 49,725
Depreciation and amortization 11,908 146,204 147,683
Research and development expenses, net (*) 924 215,953 224,768
Other 29,360 525,788 404,285
------- --------- ---------
394,689 4,678,463 3,459,417
Less - expenses charged to fixed assets - 3,949 4,208
------- --------- ---------
394,689 4,674,514 3,455,209
(Decrease) increase in inventory of goods and
work in process (2,660) (16,506) 3,105
------- --------- ---------
392,029 4,658,008 3,458,314
Increase in inventory of finished goods (13,335) (175,467) (20,547)
------- --------- ---------
378,694 4,482,541 3,437,767
------- --------- ---------
Trading operations:
-------------------
Merchandise 26,362 438,594 471,310
Labor 63,311 55,394 93,235
Depreciation 25,365 26,155 26,873
Others 307,925 274,931 200,099
------- --------- ---------
422,963 795,074 791,517
------- --------- ---------
801,657 5,277,615 4,229,284
======= ========= =========
(*) Net of grants and participations that were
received and royalties that were paid 924 8,219 (8,446)
======= ========= =========
F-82
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
C. Selling and marketing expenses - consolidated:
Year ended December 31
--------------------------------------------
2005 2004 2003
---------- ---------- ----------
NIS thousands
Salaries 34,218 282,044 203,345
Commissions 16,462 149,584 138,024
Advertising expenses 9,707 36,135 21,224
Depreciation and amortization 596 112,093 95,455
Other 28,163 486,208 376,985
---------- ---------- ----------
89,146 1,066,064 835,033
========== ========== ==========
D. General and administrative expenses:
Consolidated Company
------------------------------------------- -----------------------------------------
Year ended December 31 Year ended December 31
------------------------------------------- -----------------------------------------
2005 2004 2003 2005 2004 2003
------- ------- ------- ------ ------ ------
NIS thousands NIS thousands
------------------------------------------- -----------------------------------------
Salaries 72,240 190,086 171,067 27,187 22,399 17,325
Bad and
doubtful debts 3,733 54,766 36,061 - - -
Depreciation and
amortization 4,638 22,542 22,374 1,283 1,262 1,342
Other 83,353 192,951 154,939 28,825 22,987 22,497
------- ------- ------- ------ ------ ------
163,964 460,345 384,441 57,295 46,648 41,164
======= ======= ======= ====== ====== ======
F-83
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
E. Financing expenses, net:
Consolidated Company
------------------------------------------- -----------------------------------------
Year ended December 31 Year ended December 31
------------------------------------------- -----------------------------------------
2005 2004 2003 2005 2004 2003
------- ------- ------- ------ ------ ------
NIS thousands NIS thousands
------------------------------------------- -----------------------------------------
In respect of
convertible
debentures - 18,942 15,319 - - 612
In respect of
debentures 26,512 - - 26,512 - -
In respect of
long-term loans 155,387 199,326 141,078 122,391 111,396 94,641
In respect of
short-term loans
and credit 36,660 77,298 181,423 23,800 10,756 (2,458)
Amortization of
capital raising
expenses - 4,334 2,106 - - -
Gains from
marketable
securities, net (27,545) (22,393) (68,757) (25,540) (18,568) (61,974)
Interest
capitalized to
fixed assets and
work in process - - (305) - - -
Expenses
(income) from
balance with
investees, net - - - (302) 1,430 (2,833)
Expenses
(income) from
deposits and
others, net (8,057) (5,423) (34,376) (2,025) 5,792 7,120
------- ------- ------- ------- ------- ------
182,957 272,084 236,488 144,836 110,806 35,108
======= ======= ======= ======= ======= ======
F-84
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
F. Other income (expenses), net
Year ended December 31
--------------------------------------------
2005 2004 2003
------- ------- --------
NIS thousands
1. Consolidated:
Sale of investments and activities in investees
(including changes in rates of holding) 308,025 223,095 22,211
Expenses relating to the termination of activities
and sale and write-down of assets, net (68,746) (73,523) (107,031)
Supplemental severance pay and pensions (38,531) (45,356) 8,329
Management services - affiliated companies 13,820 455 293
Securitization costs (see Note 3B(4)) - (27,783) (16,112)
Compensation for damages - - 3,017
Amortization of goodwill (507) (131,934) (113,545)
Miscellaneous, net 9,144 (17,346) 8,599
------- ------- --------
223,205 (72,392) (194,239)
======= ======= ========
Year ended December 31
--------------------------------------------
2005 2004 2003
------- ------- --------
NIS thousands
2. Company:
Profit from sale of investments in
investee companies 424,261 212,024 7,039
Write-down in value of long-term assets - - (12,382)
Rental income, net* 7,202 8,135 7,216
Capital gain from sale of fixed assets (7) - (96)
Dividend 10,389 4,701 -
Miscellaneous, net (3,712) 10,099 3,914
------- ------- --------
438,133 234,959 5,691
======= ======= ========
* Depreciation included in the item 760 760 668
======= ======= ========
F-85
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)
G. Koor's equity in the operating results of investee companies,
net
1. Consolidated:
Year ended December 31
--------------------------------------------
2005 2004 2003
------- ------- --------
NIS thousands
Affiliated companies, net 430,492 (10,779) (110,955)
Amortization of goodwill (66,957) (24,281) (5,774)
------- ------- --------
363,535 (35,060) (116,729)
======= ======= ========
2. Company:
Year ended December 31
--------------------------------------------
2005 2004 2003
------- ------- --------
NIS thousands
Equity of Koor in operating results 195,115 57,192 51,709
Amortization of goodwill (60,499) (30,992) (15,439)
------- ------- --------
Total* 134,616 26,200 36,270
======= ======= ========
Dividend received/proposed 22,019 74,201 23,043
======= ======= ========
*Composition: Year ended December 31
--------------------------------------------
2005 2004 2003
------- ------- --------
NIS thousands
Subsidiaries 260,441 122,172 151,053
Proportionately consolidated companies (75,199) (61,114) -
Affiliates (50,629) (34,858) (114,783)
------- ------- --------
134,616 26,200 36,270
======= ======= ========
F-86
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)
H. Income (expenses) from investee companies and their participation in
expenses - Company
Year ended December 31
--------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------ ----------------------------- ------------------------------
Consolidated Affiliated Consolidated Affiliated Consolidated Affiliated
companies companies companies companies companies companies
------------- -------------- -------------- ------------- -------------- --------------
NIS thousands
--------------------------------------------------------------------------------------------
Income from
management
services 2,057 17,967 22,334 - 25,006 -
============= ============== ============== ============= ============== ==============
Administrative
expenses -
Salary and other
administrative
expenses 2,751 - 1,457 - 1,679 -
============= ============== ============== ============= ============== ==============
Financing
income
(expenses), net (302) - 1,430 - (2,828) (5)
============= ============== ============== ============= ============== ==============
Rental income,
net - 7,200 - - - -
============= ============== ============== ============= ============== ==============
F-87
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 24 - Discontinued Operations
1. On November 30, 2005 the closing of the transactions for the
sale of Elisra to Elbit took place, in accordance with the
agreements from July 6, 2005. See Note 3D.
Following are the assets and liabilities relating to the discontinued
operations:
Year ended December 31
-------------------------------
2005 2004
------------- -------------
NIS thousands NIS thousands
------------- -------------
Assets related to discontinued operations:
Cash and cash equivalents - 297,507
Short-term deposits and investments - 39,660
Trade receivables - 364,991
Other accounts receivable - 36,762
Inventories and work in progress,
net of customer advances - 123,255
Other long-term investments and receivables - 111,508
Fixed assets, net - 108,306
Intangible assets, deferred tax assets and deferred expenses - 27,660
------------- -------------
Total assets - 1,109,649
============= =============
Liabilities related to discontinued operations:
Credit from banks and others - 75,880
Trade and other payables - 323,935
Customer advances - 180,807
Bank loans, net of current maturities - 60,312
Customer advances, net of costs incurred on projects - 142,164
Deferred taxes - 6,284
Liability for employee severance benefits, net - 43,309
Minority interest - 83,689
------------- -------------
- 916,380
============= =============
F-88
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 24 - Discontinued Operations (cont'd)
1. (cont'd)
Following are the results of operations of the discontinued operations,
as included in the financial statements for the year ended December 31:
2005 2004 2003
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Revenues and earnings
Revenue from sales and services 969,235 1,109,524 1,255,490
Other income, net 142,734 - -
------------- ------------- -------------
1,111,969 1,109,524 1,255,490
Costs and losses
Cost of sales and services 894,249 940,111 1,096,978
Selling and marketing expenses 91,817 85,454 91,431
General and administrative expenses 50,996 55,795 68,253
Koor Group's equity in the operating results of - - 130
Finance expenses, net 3,271 (675) (6,452)
Other expenses, net - 12,265 27,614
------------- ------------- -------------
1,040,333 1,092,950 1,277,954
------------- ------------- -------------
Earnings before income tax 71,636 16,574 (22,464)
Income tax (15,874) (9,485) 10,069
------------- ------------- -------------
55,762 7,089 (12,395)
Minority interest in subsidiaries' results, net 44,116 (1,821) 4,290
------------- ------------- -------------
Net earnings for the year 99,879 5,268 (8,105)
============= ============= =============
2. Koor Trade Ltd.
In 2005, the Board of Directors of the Group granted the Group's
management the authority to sell the Group's entire holding in Koor
Trade Ltd. The management is of the opinion that the closing of the
transaction will take place during 2006. Therefore the activities of
Koor Trade have been classified as discontinued operations. The Company
recorded a provision in the amount of approximately NIS 20 million for
impairment in value of its investment in Koor Trade, based on
indicators relating to the fair value of the investment, including a
valuation by an external valuation expert.
F-89
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 24 - Discontinued Operations (cont'd)
2. Koor Trade Ltd. (cont'd)
Following are the assets and liabilities relating to the discontinued
operation as at December 31:
2005 2004
------------- -------------
NIS thousands NIS thousands
------------- -------------
Assets related to discontinued operation:
Cash and cash equivalents 30,379 28,504
Short-term deposits and investments 4,713 4,671
Trade receivables 52,233 48,910
Other accounts receivable 32,348 5,259
Inventories 19,516 12,971
Investments in affiliates 18,530 48,899
Other long-term investments and receivables 26,546 -
Fixed assets, net 6,989 5,555
Intangible assets, deferred tax assets
and deferred expenses, net 7,562 8,584
------------- -------------
198,816 163,353
============= =============
Liabilities related to discontinued operation:
Credit from banks and others 9,629 5,376
Trade and other payables 147,884 56,589
Customer advances 55 2,458
Other loans, net of current maturities 156 3,380
Liability for employee severance
benefits, net 1,645 1,318
Minority interest 679 369
------------- -------------
160,048 69,490
============= =============
F-90
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 24 - Discontinued Operations (cont'd)
2. Koor Trade Ltd. (cont'd)
Following are the results of operations of the discontinued operations,
as included in the financial statements, for the year ended December
31:
2005 2004 2003
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Revenues and earnings
Revenue from sales and services 157,171 111,536 96,314
Group's equity in the operating results
of affiliates, net (33,674) 7,373 3,036
Other income - 5,898 2,132
------------- ------------- -------------
123,497 124,807 101,482
------------- ------------- -------------
Costs and losses
Cost of sales and services 110,160 69,953 66,682
------------- ------------- -------------
Selling and marketing expenses 28,827 20,686 13,993
General and administrative expenses 11,524 9,864 8,050
Other expenses 18,068 - -
Finance expenses, net 1,409 (47) (1,836)
------------- ------------- -------------
169,988 100,456 86,889
------------- ------------- -------------
Earnings before income tax (46,491) 24,351 14,593
Income tax (2,855) (5,285) (1,588)
------------- ------------- -------------
(49,346) 19,066 13,005
Minority interest in subsidiaries' results, net (151) (146) (91)
------------- ------------- -------------
Net earnings (loss) for the year (49,497) 18,920 12,914
============= ============= =============
F-91
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 25 - Business Segments
A. The Koor Group operates in the following business segments:
Most of the Group's telecommunication activities are focused
in two companies - Telrad Networks Ltd., which develops and
markets telecom products and provides end-user solutions and
appears as an affiliated company as of the end of the second
quarter of 2005, and ECI Telecom Ltd., an affiliated company,
that provides solutions for broadband access networks and
transmission optical networks. In addition, the
telecommunications segment includes a number of subsidiaries
that develop and market equipment in the fields of microwave
and cellular communications.
The Group's agrochemical activities are carried out through
M-A Industries considered one of the world's foremost
manufacturer of generic crop protection solutions. M-A
Industries produces a full range of products, including
insecticides, fungicides and herbicides, as well as plant
growth regulators. In addition, the M-A Industries is engaged
in specialty aroma chemicals and other different kinds of
chemicals. As of 2005, M-A Industries is included in the
financial statements according to the equity method.
Activities in venture capital investments are carried out
through the Koor Corporate Venture Capital partnership, which
invests in high-tech companies and venture capital funds with
high growth potential. Most of the investments are in the
fields of communication and life sciences.
The Group's tourism activities are conducted primarily by
Sheraton Moriah, which holds the Sheraton Hotel chain in
Israel, Isram, a group tour operator that operates worldwide
and Knafayim-Arkia (an affiliated company until the third
quarter of 2004) which holds 40% of the EL-AL airline company
and provides aviation and holiday services and leases
aircrafts to other companies.
B. Segment sales include products sold and services rendered to
unrelated customers, which are not part of the group.
Inter-industry segment sales are immaterial and are based
primarily on prices determined in the ordinary course of
business. Accordingly, these sales are not presented
separately. Segment operating earnings include all costs and
expenses directly related to the relevant segment and for
those that benefit more than one segment, are charged on a
proportionate basis. Identifiable assets and liabilities by
industry segments are those that are used by Koor in its
activities in each segment.
F-92
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 25 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group -
consolidated:
Year ended December 31
-------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- -----------------------------
NIS thousands % NIS thousands % NIS thousands %
------------- ---------- ------------- ---------- ------------- ----------
Revenues and
earnings
Telecommunication* 452,433 45.77 671,531 8.39 827,001 13.05
Agro-chemicals - - 6,895,238 86.11 5,191,913 81.91
Tourism 526,194 53.24 430,280 5.37 309,264 4.88
Others 9,755 0.99 10,564 0.13 10,448 0.16
------- ------ --------- ------ --------- ------
Total 988,382 100.00 8,007,613 100.00 6,338,626 100.00
======= ====== ========= ====== ========= ======
* Including sales
to major customer 180,130 586,114 753,863
======= ========= =========
Year ended December 31
-------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- -----------------------------
NIS thousands % NIS thousands % NIS thousands %
------------- ---------- ------------- ---------- ------------- ----------
Earnings before
income tax
Telecommunication (30,613) (5.41) (110,617) (9.85) ( 56,638) (9.16)
Defense electronics 56,180 9.93 (20,000) (1.78) - -
Agro-chemicals 559,093 98.81 1,263,541 112.53 789,213 127.61
Venture capital
investments (41,472) (7.33) (43,327) (3.86) (71,499) (11.56)
Tourism 27,646 4.89 36,651 3.26 (45,024) (7.28)
Others (5,006) (0.89) (3,414) (0.30) 2,433 0.39
------- ------ --------- ------ --------- ------
Total 565,828 100.00 1,122,834 100.00 618,485 100.00
======= ====== ========= ====== ======= ======
Joint general
expenses (45,473) (26,697) (39,585)
Financing
expenses, net (182,957) (272,084) (236,488)
------- --------- ---------
Earnings before
income tax 337,398 824,053 342,412
======= ========= =========
F-93
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 25 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group (cont'd):
The Koor Group's equity in the results of investee companies, net:
Year ended December 31
-------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- -----------------------------
NIS thousands % NIS thousands % NIS thousands %
------------- ---------- ------------- ---------- ------------- -----------
Telecommunications 29,954 8.24 (15,919) (45.40) (101,795) (87.21)
Defense
electronic (23,288) (6.40) (20,000) (57.05) - -
Agro-chemicals 360,469 99.16 - - - -
Venture capital
investments (755) (0.21) (329) (0.94) (329) (0.28)
Tourism (1,769) (0.49) (1,148) (3.27) (12,407) (10.63)
Others (1,076) (0.30) 2,336 6.66 (2,198) (1.88)
------------- ---------- ------------- ---------- ------------- -----------
363,535 100.00 (35,060) (100.00) (116,729) (100.00)
============= ========== ============= =========== ============= ===========
December 31
-----------------------------------------------------------
2005 2004
---------------------------- ----------------------------
NIS thousands % NIS thousands %
------------- ---------- ------------- ----------
Identifiable assets
Telecommunications 175,618 14.51 590,591 5.93
Agro-chemicals - - 8,242,246 82.72
Venture capital investments 121,444 10.04 175,818 1.76
Tourism 802,569 66.32 761,147 7.64
Others 110,508 9.13 194,233 1.95
--------- ------ --------- ------
Total 1,210,139 100.00 9,964,035 100.00
====== ======
Joint assets 1,215,288 566,056
Affiliated companies* 2,668,193 1,326,261
Assets relating to discontinued
operations 198,816 1,273,002
--------- ---------
5,292,436 13,129,354
========= ==========
*Investments in affiliated companies are as follows:
Telecommunications 906,237 738,782
Defense electronics - 602,134
Agro -chemicals 1,690,397 -
Tourism and others 71,559 (14,655)
--------- ---------
2,668,193 1,326,261
========= ==========
F-94
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 25 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group (cont'd):
December 31
-----------------------------------------------------------
2005 2004
---------------------------- ----------------------------
NIS thousands % NIS thousands %
------------- ---------- ------------- ----------
Identifiable liabilities
Telecommunications 91,124 41.87 260,177 10.37
Agro-chemicals - - 2,089,083 83.30
Tourism 116,128 53.37 79,099 3.16
Others 10,363 4.76 79,532 3.17
--------- ------ --------- ------
Total segments 217,615 100.00 2,507,891 100.00
====== ======
Joint liabilities 54,908 49,515
Financing commitments 2,272,277 4,562,611
Others 48,252 513,634
Liabilities relating to discontinued
operations 159,369 901,812
--------- ------ --------- ------
2,752,421 8,535,463
========= ==========
Year ended December 31
---------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- --------------------------
NIS thousands % NIS thousands % NIS thousands %
------------- ---------- ------------- ---------- ------------- ---------
Capital
investments:
Telecommunications 7,529 28.00 21,825 2.56 7,449 2.56
Agro-chemicals - - 816,287 95.44 277,195 95.44
Tourism 19,125 71.11 12,735 1.63 4,722 1.63
Others 239 0.89 148 0.37 1,061 0.37
------ ------ ------- ------ ------- ------
Total segments 26,893 100.00 850,995 100.00 290,427 100.00
====== ====== ======
Corporate assets 177 423 392
------- --------- ---------
27,070 851,418 290,819
======= ========= =========
F-95
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 25 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group (cont'd):
Year ended December 31
---------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- --------------------------
NIS thousands % NIS thousands % NIS thousands %
------------- ---------- ------------- ---------- ------------- ---------
Depreciation and
amortization:
Telecommunications 13,243 32.33 32,281 7.58 45,055 11.28
Agro-chemicals - - 364,995 85.74 318,492 79.71
Tourism 27,721 67.67 28,416 6.68 35,822 8.97
Others - - 17 - 193 0.04
------ ------ ------- ------ ------- ------
Total segments 40,964 100.00 425,709 100.00 399,562 100.00
====== ====== ======
Corporate assets 1,956 1,183 13,050
------ ------- -------
42,920 426,892 412,612
======= ========= =========
D. Revenues from sales and services by geographic destinations
according to customer location
Year ended December 31
-----------------------------------------
2005 2004 2003
--------- --------- ---------
NIS thousands
North America 517,875 1,443,596 1,032,421
Europe 109,872 3,062,793 2,357,259
South America 11,950 1,946,416 1,565,019
Asia and Australia 17,527 566,494 614,054
Africa 15,269 216,853 285,559
Israel 315,889 771,461 484,314
--------- --------- ---------
988,382 8,007,613 6,338,626
========= ========= =========
F-96
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 26 - Transactions and Balances with Related Parties
A. The following are details of interested parties in Koor
resulting from their holdings of Koor's ordinary shares:
1. Claridge Group (hereinafter - ("Claridge")
2. Anfield Ltd.
3. I.D.B. Development Corp. Ltd. (as of May 25, 2005)
B. Transactions with Related Parties - Company
1. Directors (*)
Year ended December 31
--------------------------------------------
2005 2004 2003
------- ------- --------
NIS thousands
Directors not employed by the Company,
in respect of annual compensation and
participation in meetings:
Claridge Group 126 116 115
=========== =========== ==========
Number of directors 2 2 3
=========== =========== ==========
Other directors 539 516 442
=========== =========== ==========
Number of directors 7 8 8
=========== =========== ==========
(*) Including directors who have been replaced during the
year.
F-97
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 26 - Transactions and Balances with Related Parties (cont'd)
B. Transactions with Related Parties - Company (cont'd)
2. General and administrative expenses
Year ended December 31
----------------------------------------
2005 2004 2003
-------- -------- ---------
NIS thousands
Interested parties 4,156 1,788 1,789
======== ======== =========
The Company has agreements with Claridge for the receipt of
consultancy services. These services include, inter alia,
advice in respect of investment strategies, monetary policies,
international activities, strategic partnerships and company
structuring. The agreements include instructions regarding the
indemnification of the consultants in respect of claims
connected to the consultancy, except for cases of gross
negligence and/or intentional damage. In consideration for the
consultancy the Company has agreed to pay an annual sum which
will not exceed 400,000 dollars. The agreements with Claridge
are for the period of one year and are automatically renewable
each year, unless one of the parties gives 60 days' prior
notice of the termination of the agreement.
As of 2005, the Group entered into an agreement with an
insurance company in the IDB Group regarding insurance and
indemnification of interested parties. See Note 18A(11).
3. See Note 20C(2)(h) regarding options granted to interested
parties.
Note 27 - Earnings Per Share
A. Weighted number of ordinary shares of NIS 0.001 used in the
computation of net earnings per NIS 1 par value of the shares:
Number of ordinary shares
-----------------------------------------
2005 2004 2003
---------- ---------- ----------
Total share capital used
in the computation of
earnings per share 16,555,143 16,381,279 15,716,725
========== ========== ==========
B. To examine that the conversion or exercise of convertible
securities is reasonable, the present value of these
securities was computed according to a discount rate of 3%
(December 31, 2004 - 3.5%, December 31, 2003 - 4%) for
securities linked to the CPI.
F-98
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 28 - Events Subsequent to the Balance Sheet Date
In January 2006, Koor signed an agreement for the acquisition of 50% of
the issued and paid share capital, of Epsilon Investment House Ltd.
("Epsilon"). Epsilon is engaged in providing a wide range of financial
services including portfolio management, mutual funds' management,
underwriting, provident fund management and consulting in mergers and
acquisitions.
The transaction is subject to the receipt of approvals under all
applicable laws, including the approval of the Israeli capital market
commissioner, which as at the date of these financial statements have
still not been received.
According to the agreement, Koor was allocated new shares, and also
purchased shares from certain of the existing shareholders of Epsilon,
for total consideration of NIS 105 million.
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements
A. Differences between Israeli GAAP and US GAAP
As discussed in Note 2, the accompanying consolidated financial
statements were prepared in accordance with Israeli generally accepted
accounting principles ("Israeli GAAP"), which differ in certain
significant respects from those generally accepted in the United States
of America ("US GAAP"). Information related to the nature and effect of
such differences is presented below.
1. Effect of inflation
In accordance with Israeli GAAP:
The Company, in accordance with Israeli GAAP, comprehensively
included the effect of price level changes in the accompanying
financial statements, as described in Note 2B through December
31, 2003. According to such Israeli accounting principles, the
Company discontinued the adjustment for such changes as of
January 1, 2004. The adjusted amounts included in the
financial statements as at December 31, 2003 served as the
starting point for the financial reporting at January 1, 2004.
US GAAP does not provide for recognition of the effects of
price level changes and accordingly, the effects of such
changes are excluded from amounts determined in conformity
with US GAAP.
In accordance with the directives of the US Securities and
Exchange Commission, this difference between Israeli GAAP and
US GAAP is not included in this reconciliation to US GAAP.
F-99
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP
2. Deferred taxes
a) Measurement differences
In accordance with Israeli GAAP:
Deferred taxes are recognized in respect of
differences related to assets and liabilities that
result from translation of the local currency into
the functional currency using historical exchange
rates that prevailed at the time the asset or
liability were first recorded and that result from
(1) changes in exchange rates or (2) indexing for tax
purposes.
In accordance with US GAAP:
According to paragraph 9(f) of FAS No. 109, deferred
tax liabilities or assets are not provided for
differences related to assets and liabilities that
are remeasured from the local currency into the
functional currency and that result from (1) changes
in exchange rates or (2) indexing for tax purposes.
b) Earnings from "Approved Enterprises"
Under the Israeli Law for the Encouragement of
Capital Investments, 1959, a 25% tax rate is
generally applicable on the profits of an "approved
enterprise" that received investment grants, usually
during a period of seven years.
An "approved enterprise" which chooses the
"alternative benefits" track is generally eligible
for tax benefits during the benefit period (seven or
ten years, depending on the geographical location of
the approved enterprise) as follows: tax exemption on
undistributed profits during a period of two to ten
years and a reduced tax rate of 25% for the remainder
of the benefit period.
In the event that a dividend is distributed out of
tax-exempt earnings of the "approved enterprise"
under the "alternative benefits" track, the
distributing company will generally be subject to a
25% tax on the distributed earnings.
Dividends paid to shareholders from the earnings of
an "approved enterprise" are subject to income tax at
a rate of 15%. However, if the shareholder is a
company, that shareholder will be entitled to a 15%
tax credit, upon payment of any such dividend.
In accordance with Israeli GAAP:
Deferred taxes are not provided in respect of the
undistributed tax-exempt earnings attributed to the
"approved enterprise" of subsidiaries, if such
earnings have been reinvested and are not intended to
be distributed to their shareholders.
In accordance with US GAAP:
Deferred taxes are provided in respect of the
undistributed tax-exempt earnings of approved
enterprises of subsidiaries established subsequent to
December 15, 1992, as their distribution results in
additional tax.
F-100
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
3. Salary expenses in respect of share options issued to
employees
In accordance with Israeli GAAP:
No expense is recorded with respect to stock options granted
to employees. For the accounting treatment beginning January
1, 2006 - see Note 2AD(2).
In accordance with US GAAP:
a) Fixed Option Awards
Under APB-25, total compensation cost is measured as
the difference between the share market price and the
exercise price of the option, at the date of grant.
Compensation cost so determined is charged to expense
over the vesting period.
b) Variable Option Awards:
Under APB-25 total compensation cost is measured as
the difference between the share market price and the
exercise price of the option at the end of each
reporting period. Compensation cost so determined is
charged to expense over the vesting period.
Commencing January 1, 2006, the Company and its
investees will apply FAS No. 123R which requires
entities to measure the cost of employee services
received in exchange for an award of equity
instruments based on the grant-date fair value of the
award and recognize the cost over the period during
which an employee is required to provide service in
exchange for the award.
4. The accounting treatment of marketable securities:
In accordance with Israeli GAAP:
Marketable securities which constitute a short-term investment
are stated at market value. Changes to the market value are
recorded as profits or losses.
Marketable securities which constitute a permanent investment
are stated at cost (regarding debentures, including
accumulated interest), except where market value is lower, and
the decline in value is not considered to be temporary. (See
Note 2H).
In accordance with US GAAP:
FAS No. 115 differentiates between three categories of
marketable securities: trading securities, available for sale
securities and held-to-maturity securities.
Debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost,
except where market value is lower, and the decline in value
is not considered to be temporary. Debt and equity securities
that are bought and held principally for the purpose of
selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains
and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders'
equity.
Most of the short-term marketable securities held by the Group
are available-for-sale securities.
F-101
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
5. Provisions for anticipated losses from realization of
convertible securities of investee companies:
In accordance with Israeli GAAP:
According to Opinions No. 48 and 53 of the ICPAI, a parent
company is required to record a provision for losses, which it
may incur from the potential dilution of its holdings in
investee companies, when it is probable that share options
will be exercised or debentures will be converted.
As for a new standard which will apply beginning January 1,
2006 ceasing this treatment - see Note 2AD(1).
In accordance with US GAAP:
A loss in the parent company resulting from the dilution of
its holdings, because of share options being exercised or
debentures being converted, is recorded only at the time of
exercise or conversion.
6. One-time termination benefits:
In accordance with Israeli GAAP:
Under Israeli GAAP, one-time termination benefits are recorded
only when an obligation to the employees exists.
In accordance with US GAAP:
One-time termination benefits are benefits provided to current
employees that are involuntarily terminated under the terms of
a one-time benefit arrangement. A one-time benefit arrangement
is an arrangement established by a plan of termination that
applies for a specified termination event or for a specified
future period.
A one-time benefit arrangement exists at the date the plan of
termination meets all of the following criteria and has been
communicated to employees (hereinafter referred to as the
communication date):
a. Management, having the authority to approve the
action, commits to a plan of termination.
b. The plan identifies the number of employees to be
terminated, their job classifications or functions
and their locations, and the expected completion
date.
c. The plan establishes the terms of the benefit
arrangement, including the benefits that employees
will receive upon termination (including but not
limited to cash payments), in sufficient detail to
enable employees to determine the type and amount of
benefits they will receive if they are involuntarily
terminated.
d. Actions required to complete the plan indicate that
it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn.
The difference between Israeli GAAP and US GAAP pertaining to
employee severance benefits as part of an efficiency program
is essentially a timing difference.
F-102
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
7. Earnings per share:
In accordance with Israeli GAAP:
In accordance with Opinion No. 55, basic earnings per share is
computed on the basis of the weighted average number of shares
outstanding during the year, and the dilutive effect of share
options and convertible debentures is included in the
computation of basic earnings per share if their exercise or
conversion is considered to be probable. Calculation of the
probability is based on the ratio between the market price of
the shares and the present value of the price of exercising
the stock options into shares or the present value of the
payments for conversion of the debentures into shares.
As for a new standard which will apply beginning January 1,
2006 - See Note 2AD(3).
In accordance with US GAAP:
In accordance with FAS 128 "Earnings Per Share" - basic
earnings per share is computed on the basis of the weighted
average number of shares outstanding during the year and does
not include any potential dilutive effect of options and
convertible instruments. Diluted earnings per share are
computed on the basis of the weighted average number of shares
outstanding during the year, plus the potential dilutive
effect of ordinary share options and convertible debentures
outstanding during the year, regardless of probability.
Diluted EPS calculation does not assume conversion or exercise
if the effect thereof would be anti-dilutive.
8. Venture capital fund investments:
In accordance with Israeli GAAP:
Investments in venture capital funds are reported at cost less
a provision for devaluation in the event of a permanent
impairment.
In accordance with US GAAP:
Venture capital fund investments are reported at fair value.
Changes in fair value are recognized as profits and losses.
9. Revenue recognition - Adoption of SAB 101:
In accordance with US GAAP:
During the fourth quarter of 2000, the US SEC published Staff
Accounting Bulletin No. 101 (hereinafter - "SAB 101"), which
provides stricter criteria for revenue recognition. SAB 101
was implemented for US GAAP reporting purposes retroactively
to the beginning of 2000, by way of cumulative effect at the
beginning of the year.
The cumulative effect, of the sales deferred upon initial
adoption of SAB 101, under US GAAP, was recognized over the
years 2000 through 2003. Commencing in 2004, there is no
additional impact from the deferral of these revenues.
In accordance with Israeli GAAP:
SAB 101, as discussed above, was adopted prospectively for
purposes of Israeli GAAP as of the fourth quarter of 2000,
without recording a cumulative effect to the beginning of
2000.
F-103
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
10. Derivatives
In accordance with Israeli GAAP:
The results of financial derivatives held to hedge assets and
liabilities are recorded in the statement of operations
concurrently with the recording of the changes in the hedged
assets and liabilities. Financial derivatives that are not
held for hedging are stated in the balance sheet at fair value
and changes in the fair value of such instruments are
recognized in the statement of operations in the period they
occur.
In accordance with US GAAP:
The Company applied FAS 133 to account for its derivatives.
Most derivatives in the consolidated group do not meet the
hedging criteria prescribed by FAS 133, therefore they are
stated at fair value and changes in the fair value are charged
to the statement of operations in the period they occurred.
For certain derivatives, the Group meets the criteria for
cash-flow hedging under FAS 133. These derivatives are
recorded at fair value, with changes in fair value recorded
within shareholders' equity as a component of accumulated
other comprehensive income.
11. Impairment of Long-lived Assets to be Held and Used
In accordance with Israeli GAAP:
The Company applies Standard No. 15 under which the Company is
required to test for impairment indicators and if there are
such indicators, the Company is required to calculate the
recoverable amount of the assets, which is the higher of the
net sales price and the value in use (the present value of the
estimated future cash flows expected to be derived from the
use and realization of the asset). A loss from impairment is
reversed only if changes occur in the estimates used to
determine the recoverable value of the asset.
In accordance with US GAAP:
The Company applies FAS 144 under which a long-lived asset to
be held and used is assessed for impairment using a two-step
impairment test. Under step one of the test, the carrying
amount of the long-lived asset is compared to the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. If the carrying amount
exceeds the amount calculated, an impairment loss is measured
as the amount by which the carrying amount exceeds its fair
value. Reversals of impairment losses are not allowed under US
GAAP.
F-104
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
12. Amortization of Goodwill:
In accordance with Israeli GAAP:
Goodwill is amortized over its economic life, which may not
exceed 20 years. Goodwill is tested for an impairment in value
only when there are indications of possible impairment in the
value of the goodwill.
As for a new standard which will apply beginning January 1,
2006 - See Note 2AD(5).
In accordance with US GAAP:
Effective January 1, 2002, goodwill is not amortized but
instead is evaluated for recoverability by means of an
impairment test which is performed at least once a year in
accordance with FAS 142. Impairment of goodwill upon
implementation of FAS 142 was recorded as a cumulative effect
of a change in accounting principle in the amount of NIS 806
thousand. No further impairments have been required subsequent
to the initial implementation.
13. Consolidation of M-A Industries
As a result of the sale of shares of M-A Industries at the
beginning of 2004, Koor's share ownership in M-A Industries
decreased to below 50%.
In accordance with Israeli GAAP:
The position of the Israeli Securities Authority is that when
a company has been consolidated in the financial statements of
the holding company and there has been a decrease in the
voting rights to below 50%, if the overall economic
circumstances have not essentially changed the consolidation
of the investee company should be continued because of the
importance of continuity and consistency of the accounting
reports. Therefore and as explained in Note 3B(1), as of
December 31, 2004, Koor continued to consolidate M-A
Industries' financial statements. Following an additional sale
of the Company's holding in M-A Industries in February 2005,
and based on evaluation of the new circumstances, Koor ceased
to consolidate M-A Industries as from January 1, 2005.
In accordance with US GAAP:
A controlling financial interest, generally determined by the
ownership by one company, directly or indirectly, of over
fifty percent of the outstanding voting shares of another
company, is a prerequisite for consolidation. Therefore, Koor
discontinued the consolidation of M-A Industries and began
accounting for the investment in MA Industries by the equity
method for US GAAP purposes, beginning in 2004.
14. Capitalization of licensing costs
In accordance with Israeli GAAP:
Certain costs incurred by the Company in connection with the
registration process to obtain licenses to sell products in
various jurisdictions are capitalized.
In addition, amounts which are paid by the Company to the
original registrant as data compensation costs only after the
U.S. Environmental Protection Agency (hereinafter: "EPA")
issues a registration to the Company are also capitalized.
The capitalized licensing costs are amortized over the
expected benefit period.
F-105
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
14. Capitalization of licensing costs (cont'd)
In accordance with U.S. GAAP:
The costs incurred by the Company in connection with the
registration process to obtain licenses to sell products in
various jurisdictions are deemed to be development costs under
US GAAP and are expensed as incurred.
The amounts paid by the Company to the original registrant as
data compensation costs only after the EPA issues a
registration to the Company are capitalized and amortized over
the expected benefit period.
15. Gains (losses) from decline in holdings in consolidated and
affiliated companies
Various GAAP differences affecting shareholders' equity of
consolidated or affiliated company result in differences in
the book value of the investment under Israeli and US GAAP.
Therefore the amounts of the gain or loss on sale of interest
in such consolidated subsidiaries or affiliates differs under
Israeli and US GAAP.
16. Impairment of Investment in ECI
In accordance with Israeli GAAP:
The Company applied Standard No. 15 under which the Company is
required to test the recoverable amount of the investment,
which is the higher of the net selling price and value in use
(the present value of the estimated future cash flows expected
to be derived from the use and realization of the asset). A
loss from impairment is reversed only if changes occur in the
estimates used to determine the recoverable value of the
investment.
In accordance with US GAAP:
The Company has applied APB 18 in testing for impairment of
its investment in ECI. Under APB 18, a loss is recorded only
when the impairment of the investee is other than temporary
and reversals of impairments are not allowed.
The impact of the differences between Israel GAAP and US GAAP
was as follows:
1. Recording of impairment in value
As a result of negative indications concerning ECI in
2002, an impairment charge of NIS 130 million was
recorded under both Israeli GAAP and US GAAP.
According to Israeli GAAP, the impairment charge was
recorded first by writing-off credit balances of
foreign currency translation differences that were
recorded directly to equity in the amount of NIS 105
million, and only the remainder of NIS 25 million was
recorded as an expense in the statement of income.
According to US GAAP, foreign currency translation
differences are not written-off and the entire
impairment is recorded as an expense in the statement
of income.
F-106
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
16. Impairment of Investment in ECI (cont'd)
2. Amortization differences
The Company allocated the impairment provision to the net
assets of ECI.
According to Israeli GAAP, the allocation is first to the
intangible assets of the investee and then to the non-monetary
assets of the investee on a proportional basis.
According to US GAAP the allocation is to non-current assets
only, on a proportional basis. The different bases of
allocation between Israeli GAAP and US GAAP resulted in
differences in the amortization amounts recorded in the
statement of income, due to different consumption patterns and
amortization rates of different asset types (inventory, fixed
assets, intangible assets). These differences are presented in
the reconciling item entitled "differences from investee due
to impairment previously recorded".
3. Reversal of impairment
According to Israeli GAAP, an impairment provision may be
reversed if there is an increase in the recoverable amount of
the investee company. Under Israeli GAAP the impairment charge
in ECI was reversed due to positive indicators in activity.
The reversal according to Israeli GAAP was not recorded in the
statement of income, but rather as a credit to equity as
foreign currency translation differences.
According to US GAAP, an impairment provision may not be
reversed.
17. Liabilities for employee severance benefits
In accordance with Israeli GAAP:
Amounts funded by the purchase of insurance policies and by
deposits with recognized severance pay funds are deducted from
the related severance pay liability, which is then presented
at a net amount.
In accordance with US GAAP:
The amounts funded are presented as other long-term assets and
the amount of the liability is presented under long-term
liabilities.
F-107
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israeli GAAP and US GAAP (cont'd)
18. Statements of cash flows
(a) Translation differences in respect of cash and cash
equivalents
In accordance with Israeli GAAP:
The statements shall report the effect of exchange
rate changes on cash and cash equivalents balances
held in foreign currencies, only in "autonomous
foreign entities".
In accordance with US GAAP:
The statements shall report the effect of exchange
rate changes on all cash and cash equivalents
balances held in foreign currencies.
There is no GAAP difference in respect of translation
differences in 2005 as the cash flows of subsidiaries
in respect of which GAAP differences were recorded in
2003 and 2004 are no longer consolidated in 2005.
(b) Securitization transaction
In accordance with Israeli GAAP:
The securitization transaction (see Note 3B(4)) was
classified as a sale of trade receivables. Thus, cash
flows, derived from that transaction, were classified
as cash flows from operating activities.
In accordance with US GAAP:
Until June 30, 2003 the securitization transaction
did not meet the criteria set out by FAS 140 for the
classification as a sale of trade receivables and was
classified as a secured borrowing. Therefore, cash
flows derived from this transaction until June 30,
2003 were classified as cash flows from financing
activities.
(c) Consolidation of M-A Industries
In accordance with Israeli GAAP:
In 2004, Koor consolidated M-A Industries' cash
flows. The consolidation of such cash flows was
discontinued in 2005. See Note 3B(2).
In accordance with US GAAP:
Beginning in 2004, M-A Industries is accounted under
the equity method for US GAAP purposes, therefore M-A
Industries' cash flows for 2004 are not consolidated.
Therefore, under Israeli GAAP, MA Industries' cash
and cash equivalents are included in the consolidated
closing balance of cash and cash equivalents in 2004,
and in the consolidated opening balance of cash and
cash equivalents for 2005.
Under US GAAP, MA Industries' cash and cash
equivalents are not included in the consolidated
closing balance of cash and cash equivalents in 2004,
or in the consolidated opening balance of cash and
cash equivalents for 2005.
See also Note 29A(13).
F-108
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the differences between Israeli and US GAAP on
the financial statements
1. Statements of operations:
Year ended December 31
------------------------------------------------
2005 2004 2003
---------- ---------- -----------
NIS thousands
------------------------------------------------
a) Net earnings as reported, according to
Israeli GAAP 313,159 144,990 46,362
Salary expenses in respect of share options
issued to employees - Note 29A(3) (64,692) (91,318) (185,276)
Loss (gain) from marketable securities, net -
Note 29A(4) (11,614) (4,295) (58,319)
Provisions for anticipated losses from realization
of convertible securities in investee companies
- Note 29A(5) 2,272 10,106 50,729
One-time termination benefits
- Note 29A(6) (17,326) 17,326 (10,181)
Gains from decline in holding in consolidated
and affiliated companies - Note 29A(15) (20,429) 11,829 -
Venture capital investments - Note 29A(8) 31,714 (20,726) 15,790
Temporary differences resulting from recognition
of revenue arising from application of SAB 101
- Note 29A(9) - - 7,949
Impairment in value of long-lived assets to be
held and used - Note 29A(11) - (1,277) (4,983)
Differences from investee due to impairment
previously recorded - Note 29A(16) 28,038 29,588 (19,676)
Amortization of goodwill - Note 29A(12) 46,129 39,938 40,949
Capitalization of licensing costs - Note 29A(14) 3,217 (8,859) (16,793)
Derivatives (FAS 133) - Note 29A(10) 6,839 4,602 (34,002)
Other 3,120 711 1,060
Income taxes - Note 29A(2) 38,152 (21,213) (79,808)
Minority interests in respect of the above
differences (10,174) 170 137,275
Cumulative effect as at beginning of the year of
change in accounting method 3,054 - -
---------- ---------- -----------
38,300 (33,418) (155,286)
---------- ---------- -----------
Net earnings (loss) according to US GAAP 351,459 111,572 (108,924)
========== ========== ===========
Net earnings (loss) from continuing operations
according to US GAAP 295,975 83,109 (109,316)
========== ========== ===========
Net earnings (loss) from discontinued operations
according to US GAAP 55,484 28,463 392
========== ========== ===========
F-109
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the differences between Israeli and US GAAP on
the financial statements (cont'd)
1. Statements of operations (cont'd):
b) Earnings (loss) per ordinary share
Year ended December 31
-------------------------------------------------
2005 2004 2003
----------- ------------ -----------
NIS
-------------------------------------------------
Basic earnings (loss) per ordinary share according to US GAAP:
From continuing operations 18.40 5.25 (7.07)
From discontinued operations 3.45 1.80 0.03
----------- ------------ -----------
Net earnings 21.85 7.05 (7.04)
=========== ============ ===========
Weighted average of number of shares
and share equivalents according to
US GAAP 16,082,258 15,824,185 15,474,614
=========== ============ =============
Fully diluted earnings (loss) per ordinary share according to
US GAAP:
From continuing operations 16.42 3.14 (7.85)
From discontinued operations 3.35 1.75 0.03
----------- ------------ -------------
Net earnings 19.77 4.89 (7.82)
=========== ============ =============
Weighted average of number of shares and
share equivalents according to US GAAP 16,565,358 16,242,770 15,474,614
=========== ============ =============
F-110
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the differences between Israeli and US GAAP on
the financial statements (cont'd) 2. Balance sheet:
December 31
----------------------------------------------------------------
2005 2004**
----------------------------------------------------------------
Israeli Israeli
GAAP GAAP
Adjustment US GAAP
------------- ------------- ------------- -------------
NIS thousands NIS thousands NIS thousands NIS thousands
------------- ------------- ------------- -------------
Cash and cash equivalents 318,798 - 318,798 291,299
Short-term deposits and investment - Note 29A(4) 541,159 12,127 553,286 372,137
Trade receivables 93,544 - 93,544 1,759,698
Other receivables 87,937 - 87,937 483,450
Inventories and projects in progress 90,909 - 90,909 2,158,659
Assets designated for sale - - - 41,765
Investments in affiliates (1) 2,668,193 (72,808) 2,595,385 1,326,261
Other investments and receivables - Note 29A(4); Note 547,013 67,403 614,416 392,763
29A(17)
Fixed assets, net - Note 29A(2); Note 29A(11) 726,606 45,876 772,482 2,709,106
Intangible assets, deferred tax assets and deferred
expenses - Note 29A(12) 19,461 - 19,461 2,321,214
Assets relating to discontinued operations 198,816 1,086 199,902 1,273,002
Total assets 5,292,436 53,684 5,346,120 13,129,354
Credit from banks and others 272,127 - 272,127 1,657,200
Trade payables 91,606 - 91,606 1,557,522
Other payables - Note 29A(6); Note 29A(10) 203,289 14,722 218,011 1,098,851
Customer advances 21,942 - 21,942 27,942
Long-term bank loans and other long-term loans 1,609,296 - 1,609,296 2,259,211
Debentures 390,854 - 390,854 -
Convertible debentures - - - 811,291
Deferred taxes - Note 29A(2) 78 26,942 27,020 234,184
Liability for employee severance benefits - Note 29A(17) 3,860 8,322 12,182 152,541
Liabilities relating to discontinued operations 160,048 1,086 161,134 985,870
Minority interests (1) 56,729 2,107 58,836 2,468,275
Additional paid-in capital for "available-for-sale" - 27,945 27,945 -
securities - Note 29A(4)
Additional paid-in capital - Note 29A(3); Note 29A(5);
Note
29A(10); (2) 2,601,797 325,738 2,927,535 2,358,425
Retained earnings (deficit) (1) (677,634) (353,178) (1,030,812) (966,152)
Total shareholders' equity 2,482,607 505 2,483,112 1,876,467
* See Note 29A(13)
** Reclassified in respect to discontinued operations. (See Note 24).
(table continued)
December 31
------------------------------------------------------------
2004**
------------------------------------------------------------
Discontinuance of
consolidation
of M-A Industries* Adjustment US GAAP
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Cash and cash equivalents (174,375) - 116,924
Short-term deposits and investment - Note 29A(4) (6,733) 32,911 398,315
Trade receivables (1,590,552) - 169,146
Other receivables (332,817) - 150,633
Inventories and projects in progress (1,985,428) - 173,231
Assets designated for sale - - 41,765
Investments in affiliates (1) 1,471,197 (154,317) 2,643,141
Other investments and receivables - Note 29A(4); Note (95,073) 83,311 381,001
29A(17)
Fixed assets, net - Note 29A(2); Note 29A(11) (1,876,731) 8,574 840,949
Intangible assets, deferred tax assets and deferred
expenses - Note 29A(12) (2,316,290) 7,351 12,275
Assets relating to discontinued operations - 141,641 1,414,643
Total assets (6,906,802) 119,471 6,342,023
Credit from banks and others (603,210) - 1,053,990
Trade payables (1,404,171) - 153,351
Other payables - Note 29A(6); Note 29A(10) (867,233) 1,325 232,943
Customer advances (9,891) - 18,051
Long-term bank loans and other long-term loans (440,968) - 1,818,243
Debentures - - -
Convertible debentures (811,291) - -
Deferred taxes - Note 29A(2) (234,157) (26) 1
Liability for employee severance benefits - Note 29A(17) (115,061) 78,699 116,179
Liabilities relating to discontinued operations - 145,763 1,131,633
Minority interests (1) (2,420,820) 2,327 49,782
Additional paid-in capital for "available-for-sale" - 6,442 6,442
securities - Note 29A(4)
Additional paid-in capital - Note 29A(3); Note 29A(5);
Note
29A(10); (2) - 276,419 2,634,844
Retained earnings (deficit) (1) - (391,478) (1,357,630)
Total shareholders' equity - (108,617) 1,767,850
* See Note 29A(13)
** Reclassified in respect to discontinued operations. (See Note 24).
F-111
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the differences between Israeli and US GAAP on the
financial statements (cont'd)
(1) These items are impacted by all the various differences between
Israeli GAAP and US GAAP that are described in the reconciliation to
US GAAP.
(2) This item also includes cumulative foreign currency translation
adjustments in respect of all the various differences between Israeli
GAAP and US GAAP that are described in the reconciliation to US GAAP.
3. Comprehensive income (loss)
"Comprehensive income (loss)" consists of the change, during the
current period, in the Company's shareholders' equity that does not
derive from shareholders' investments or from the distribution of
earnings to shareholders.
Comprehensive income (loss) includes two components - net income and
other comprehensive income. Net income is the income stated in the
statement of operations, while other comprehensive income includes
the amounts that are recorded directly in shareholders' equity and
that are not derived from transactions with shareholders recorded
directly in shareholders' equity.
Year ended December 31
------------------------------------------------
2005 2004 2003
------------------------------------------------
NIS thousands
------------------------------------------------
Net income (loss) according to US GAAP 351,459 111,572 (108,924)
------- ------- --------
Other comprehensive income, after tax:
Adjustments from translation of
financial statements of investee
companies 199,986 (9,546) (143,585)
Adjustments in respect of derivatives 26,737 (10,964) 6,487
Unrealized gains from securities 21,503 36,516 32,572
------- ------ --------
Total other comprehensive income (loss) 248,226 16,006 (104,526)
------- ------ --------
Total comprehensive income (loss) 599,685 127,578 (213,450)
========= ========= ==========
F-112
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the differences between Israeli and US GAAP on the
financial statements (cont'd)
4. Cash flows:
Year ended December 31
------------------------------------------------
2005 *2004 *2003
------------------------------------------------
NIS thousands
------------------------------------------------
Net cash flows from operating activities:
Israeli GAAP (175,051) 894,406 773,050
Adjustments (1) (2) (3) (823) (907,798) (235,808)
---------- --------- ---------
US GAAP (175,874) (13,392) 537,242
---------- --------- ---------
Net cash flows from investing activities:
Israeli GAAP 418,930 (722,839) 266,585
Adjustments (1) 174,375 383,650 -
---------- --------- ---------
US GAAP 593,305 (339,189) 266,585
---------- --------- ---------
Net cash flows from financing activities:
Israeli GAAP (552,989) (128,069) (1,209,783)
Adjustments (1) ((2)) - 340,457 211,182
---------- --------- ---------
US GAAP (552,989) 212,388 (998,601)
---------- --------- ---------
Translation differences in respect of cash and
cash equivalents:
Israeli GAAP 22,553 (15,858) (28,273)
Adjustments (3) 823 9,316 24,626
---------- --------- ---------
US GAAP 23,376 (6,542) (3,647)
---------- --------- ---------
Increase (decrease) in cash and cash equivalents:
Israeli GAAP (286,557) 27,640 (198,421)
Adjustments (1) 174,375 (174,375) -
---------- --------- ---------
US GAAP (112,182) (146,735) (198,421)
---------- --------- ---------
Increase (decrease) in cash and cash equivalents
from discontinued operations:
Israeli GAAP and US GAAP 314,056 (83,192) 117,970
Increase (decrease) in cash and cash equivalents
from continuing operations:
Israeli GAAP 27,499 (55,552) (80,451)
Adjustments (1) 174,375 (174,375) -
---------- --------- ---------
US GAAP 201,874 (229,927) (80,451)
---------- --------- ---------
Balance of cash and cash equivalents at beginning
of year:
Israeli GAAP 291,299 346,851 427,302
Adjustments (1) (174,375) - -
---------- --------- ---------
US GAAP 116,924 346,851 427,302
---------- --------- ---------
Balance of cash and cash equivalents at end of
year:
Israeli GAAP 318,798 291,299 346,851
Adjustments (1) - (174,375) -
---------- --------- ---------
US GAAP 318,798 116,924 346,851
---------- --------- ---------
(1) See Note 29A(18)(c).
(2) See Note 29A(18)(b).
(3) See Note 29A(18)(a).
* Reclassified in respect to discontinued operations (See Note 24).
F-113
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the differences between Israeli and US GAAP on the
financial statements (cont'd)
5. Changes in shareholders' equity in accordance with US GAAP
Company Cumulative
Number shares held foreign
of Additional by the currency Retained
ordinary Share paid-in Company and translation earnings
shares (1) capital capital subsidiaries adjustments (deficit) Total
-------------------------------------------------------------------------------------------
Reported amounts
-------------------------------------------------------------------------------------------
NIS thousands
-------------------------------------------------------------------------------------------
Balance at December 31,
2003 15,741,160 564,515 2,800,211 (80,321) (233,081) (1,469,202) 1,582,122
Changes during 2004:
Net earnings - - - - - 111,572 111,572
Unrealized gains from
available-for-sale securities - - 36,516 - - - 36,516
Exercise of stock options
granted to employees 83,025 *- - - - - -
Employee stock option
compensation expenses - - 58,150 - 58,150
Derivatives (FAS 133) - - (10,964) - - - (10,964)
Cumulative foreign currency
translation adjustments, net - - - - (9,546) - (9,546)
---------- --------- -------- ------- -------- --------- -----------
Balance at
December 31, 2004 15,824,185 564,515 2,883,913 (80,321) (242,627) (1,357,630) 1,767,850
Changes during 2005:
Net earnings - - - - - 351,459 351,459
Issuance of treasury stock 193,229 - - 74,250 - (24,641) 49,609
Issuance of stock options - - 21,715 - - - 21,715
Unrealized gains from
available-for-sale securities - - 21,503 - - - 21,503
Exercise of stock options
granted to employees 129,254 *- - - - - -
Employee stock option
compensation expenses - - 44,253 - - - 44,253
Derivatives (FAS 133) - - 26,737 - - - 26,737
Cumulative foreign currency
translation adjustments, net - - - - 199,986 - 199,986
---------- --------- -------- ------- -------- --------- -----------
Balance as
December 31,2005 16,146,668 564,515 2,998,121 (6,071) (42,641) (1,030,812) 2,483,112
=========== ========= ========= ======= ======== ========= ===========
* Represents an amount lower than NIS 1,000.
(1) Net of the Company holdings and its subsidiaries' holdings.
F-114
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
C. Condensed figures of M-A Industries and ECI according to Regulation
S-X 4-08
(1) M-A Industries condensed figures
A. As at December 31,
Israeli GAAP Adjustments US GAAP Israeli GAAP Adjustments US GAAP
------------- ------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- ------------- -------------
2005 2005 2005 2004 2004 2004
------------- ------------- ------------- ------------- ------------- -------------
Current assets 1,108,638 18,659 1,127,297 949,338 5,323 954,661
Non-current
assets 1,021,104 55,095 1,076,199 985,229 42,118 1,027,347
Current liabilities 797,867 2,718 800,585 669,571 14,685 684,256
Non-current
liabilities 127,713 36,724 164,437 333,423 24,631 358,054
Minority
interests 28,586 (2,256) 26,330 18,756 (1,981) 16,775
Convertible
debentures 40,479 - 40,479 38,322 - 38,322
B. According to Israeli GAAP, for the year ended December 31,
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Revenue from sales and services 1,740,717 1,539,702
Gross profit 681,002 595,794
Net income according to Israeli GAAP 205,493 165,527
Adjustment to US GAAP 20,607 (41,789)
Net income according to US GAAP 226,100 123,738
(2) ECI's condensed figures according to US GAAP
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
As at December 31
Current assets 436,205 449,556
Non-current assets 412,530 405,253
Current liabilities 176,989 248,012
Non-current liabilities 48,497 50,943
Minority interests 4,120 4,086
For the year ended December 31
Revenues 629,918 496,712
Gross profit 262,139 195,741
Income from continuing operations 39,864 14,056
Net income 39,864 10,153
F-115
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
D. Summarized financial information of proportionately consolidated
companies
(1) Telrad
A. As at December 31, 2004
Israeli GAAP Adjustments US GAAP
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Current assets 295,867 4,735 300,602
Non-current assets 144,386 6,735 151,121
Current liabilities 197,173 (17,326) 179,847
Non-current liabilities 86,589 - 86,589
Minority interests 4,814 3,765 8,579
B. Statement of operations data (1)
For the six For the three
months ended months ended
June 30, December 31,
2005 2004
------------- -------------
NIS thousands NIS thousands
------------- -------------
Revenue from sales and services 177,631 93,403
Gross profit (loss) 9,898 (11,565)
Net loss according to Israeli GAAP (90,136) (61,114)
Adjustment to US GAAP (16,952) 18,970
Net loss according to US GAAP (107,088) (42,144)
Cash flows from operating activities (4,072) 7,259
Cash flows from investing activities (3,418) (13,043)
Cash flows from financing activities (9,265) 27,757
(1) Telrad was included in Koor's financial statements by the
proportionate consolidation method from the fourth quarter of
2004 until June 30, 2005. See Note 3C(1).
F-116
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
(2) Proportionately consolidated companies of Sheraton
A. As at December 31,
Israeli GAAP Adjustments US GAAP Israeli GAAP Adjustments US GAAP
-------------- ------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
-------------- ------------- ------------- ------------- ------------- -------------
2005 2005 2005 2004 2004 2004
-------------- ------------- ------------- ------------- ------------- -------------
Current assets 27,113 - 27,113 20,694 - 20,694
Non-current
assets 216,191 1,837 218,028 220,893 (2,516) 218,377
Current
liabilities (50,585) - (50,585) 29,530 - 29,530
b
liabilities (217,459) (3,287) (220,746) 219,890 - 219,890
B. For the year ended December 31,
2005 2004
NIS thousands NIS thousands
------------- -------------
Revenue from sales and services 89,460 83,238
Gross profit 24,446 22,710
Net loss according to Israeli GAAP (17,772) (1,416)
Adjustment to US GAAP 3,902 1,078
Net loss according to US GAAP (13,870) (338)
Cash flows from operating activities 7,004 5,808
Cash flows from investing activities (3,276) 942
Cash flows from financing activities (1,100) (3,584)
F-117
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------
Note 30 - Change in Principal Shareholders (Unaudited)
On May 1, 2006, Discount Investments Corp. Ltd., a subsidiary of IDB
Development Corporation Ltd., signed an agreement to acquire from the
Claridge Group, as well as from Anfield Ltd. (a company registered in
Israel and owned by Jonathan B. Kolber, the Company's Chief Executive
Officer) and another entity, all of the Koor's shares held by those
entities totaling 5,753,207 shares, or approximately 34.9% of Koor's
outstanding shares, for $ 445.8 million. As of June 30, 2006 all
approvals to which the transaction is subject, including Israel's
anti-trust commissioner, have been granted and the closing of the
transaction is expected to take place shortly. Subsequent to the
closing, the Company expects that changes in the composition of its
Board of Directors and management will occur. Discount Investments is
held 74.2% by IDB Development, which also holds 10% of Koor's
outstanding ordinary shares.
F-118
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Koor Venture Capital L.P.
We have audited the accompanying balance sheets of Koor Ventures
Capital L.P. (the "Partnership") as at December 31, 2005 and 2004, and the
related statements of operations, shareholders' equity and cash flows, for each
of the three years, the last of which ended December 31, 2005. These financial
statements are the responsibility of the Partnership's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of certain affiliate (Scopus
Video Networks Ltd.), whose company's investments constitute NIS 44,964 thousand
and NIS 12,466 thousand, as at December 31, 2005 and 2004, respectively, and its
equity in losses constitute NIS 755 thousand, NIS 329 thousand and NIS 329
thousand for the years ended December 31, 2005, 2004 and 2003, respectively. The
financial statements of the affiliate were audited by other auditors whose
reports thereon were furnished to us. Our opinion, insofar as it relates to
amounts included for those companies, is based solely on the said reports of the
other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Partnership's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and on the reports of the above-mentioned
other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of the Partnership as of December
31, 2005 and 2004 and the results of their operations, the changes in
shareholders' equity and their cash flows for each of the three years, the last
of which ended December 31, 2005, in conformity with accounting principles
generally in Israel which differ in certain respects from those following in the
United States, as described in Note 9 to the financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 21, 2006 A Member of Ernst & Young Global
F-119
[Letterhead of Brightman Almagor & Co.,
a Member Firm of Deloitte Touche Tohmatsu]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Scopus Video Networks Ltd.
We have audited the accompanying consolidated balance sheets of Scopus Video
Networks Ltd. and its subsidiary ("the Company") as of December 31, 2005 and
2004 and the related consolidated statements of operations, shareholders' equity
and cash flows, for each of the three years, in the period ended December 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Scopus Video
Networks Ltd. and its subsidiary as of December 31, 2005 and 2004, and the
results of their operations, and their cash flows for each of the three years,
in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
Accounting principles generally accepted in the United States of America vary in
certain significant respects from accounting principles generally accepted in
Israel. The application of the latter would have affected the Company's net loss
for the years presented to the extent summarized in Note 16.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
March 16, 2006
F-120
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
LUXEMBURG PHARMACEUTICAL LTD.
We have audited the accompanying consolidated balance sheets of
Luxemburg Pharmaceutical Ltd. ("the Company") and its subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2005 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts (including the Company's reconciliation of the financial
statements of the aforementioned certain subsidiary to Israel generally accepted
accounting principles) and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and 2004, and the consolidated results of their operations and
cash flows for each of the three years in the period ended of December 31, 2005,
in conformity with Israel generally accepted accounting principles, which differ
in certain respects form those followed in the United States, as described in
Note 22 to the consolidated financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
February 19, 2006 A Member of Ernst & Young Global
F-121
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
LYCORED LTD.
(FORMERLY: LYCORED NATURAL PRODUCTS INDUSTRIES LTD.)
We have audited the accompanying consolidated balance sheets of Lycored
Ltd. (formerly: Lycored Natural Products Industries Ltd.) ("the Company") and
its subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2005 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of a certain subsidiary
(Lycored Limited), whose assets included in consolidation constitute
approximately 21% and 18% of total consolidated assets as of December 31, 2005
and 2004, and whose revenues included in consolidation constitute approximately
34%, 37% and 35% of total consolidated revenues for the three years ended
December 31, 2005. Those financial statements, presented in accordance with
accounting principles generally accepted in the United Kingdom and including
reconciliation to United States generally accepted accounting principles, were
audited by other auditors whose reports as of and for the years ended December
31, 2005 and 2004, have been furnished to us, and our opinion, insofar as it
relates to the amounts utilized by Company's management (before reconciliation
to Israel generally accepted accounting principles) of and for the years ended
December 31, 2005 and 2004, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts (including the Company's reconciliation of the financial statements
of the aforementioned certain subsidiary to Israel generally accepted accounting
principles) and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
of December 31, 2005, in conformity with Israel generally accepted accounting
principles, which differ in certain respects from those followed in the United
States, as described in Note 21 to the consolidated financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
February 15, 2006 A Member of Ernst & Young Global
F-122
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Lycored Limited.
We have audited the accompanying balance sheets of Lycored Limited.
("the Company") as at December 31, 2005 and 2004, and the related statements of
operations, shareholder's equity and cash flows, for each of the three years,
the last of which ended December 31, 2005. These financial statements are the
responsibility of the Company's Board of Directors and of its Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and 2004 and the results of their operations, the
changes in shareholders' equity and their cash flows for each of the three
years, the last of which ended of December 31, 2005, in conformity with
accounting principles generally in United Kingdom which differ in certain
respects from those followed in the United States, as described in Note 24 to
the financial statements.
/s/ Goodman Jones LLP
Goodman Jones LLP
29/30 Fitzroy Square
London WIT 6LQ
February 14, 2006
F-123
[Letterhead of Brightman Almagor & Co.,
a Member Firm of Deloitte Touche Tohmatsu]
Report Of Independent Registered Public Accounting Firm
To the Shareholders of
Herods Hotel Spa and Recreation Ltd
We have audited the accompanying balance sheets of Herods Hotel Spa and
Recreation Ltd. (the "Company") as at December 31, 2005 and 2004, and the
related statements of operations, changes in shareholders' deficiency, and cash
flows, for each of the three years, in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audit the financial statements referred to above
present fairly, in all material respects, the financial position of the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and 2004, and the results of operations, the changes in
shareholders' deficiency and their cash flows and on a consolidated basis for
each of the three years, the last of which ended December 31, 2005, in
conformity with accounting principles generally accepted in Israel.
As explained in Note 2(1), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). The effect of the application of the latter on the
consolidated financial position as of December 31, 2005 and on the consolidated
results of operations for the year then ended is summarized in Note 25.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
March 13, 2006
F-124
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT AUDITORS
To the Venturers of the
Joint Venture - Sheraton City Tower
We have audited the balance sheets of the Joint Venture - Sheraton City
Tower ("the Joint Venture") as of December 31, 2005 and 2004, and the related
statements of operations, changes in venturers' deficiency and cash flows for
the three years in the period ended December 31, 2005 (not presented separately
herein). These financial statements are the responsibility of the Joint
Venture's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Joint Venture's internal control over financial
reporting. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Joint Venture's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of the Joint Venture as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
of the three years in the period ended December 31, 2005, in conformity with
Israel generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 18 to
the financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
February 27, 2006 A Member of Ernst & Young Global
F-125
[Letterhead of Brightman Almagor & Co., a Member Firm
of Deloitte Touche Tohmatsu]
Report Of Independent Registered Public Accounting Firm
To the Shareholders
of Sheraton Moriah (Israel) Ltd.
We have audited the accompanying balance sheets of Sheraton Moriah (Israel) Ltd.
(the "Company") as of December 31, 2004 and 2003, and the consolidated balance
sheets of the Company and its subsidiaries as at such dates, and the related
statements of operations, shareholders' equity, and cash flows, for each of the
three years, in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the fmancial statements of certain subsidiaries, including those whose
assets constitute 2% of the total consolidated assets as of December 31, 2003,
and whose revenues constitute 12% and 18% of the total consolidated revenues for
the years ended December 31, 2003 and 2002 respectively. Furthermore, we did not
audit the financial statements of an affiliate accounted for by use of the
equity method. The Company's equity in that affiliate's net assets as of
December 31, 2004 and 2003, amounts to NIS 4.7 million and NIS 5.6 million,
respectively and its shares in losses constitutes NIS 0.9 million, NIS 1.1
million and NIS 2.2 million in that affiliate's net loss for the years ended
December 31, 2004, 2003 and 2002, respectively. The financial statements of
those consolidated subsidiaries and the affiliate which were prepared in
accordance with Israeli GAAP, were audited by other auditors whose reports
thereon were furnished to us, and our opinion, insofar as it relates to amounts
included for such subsidiaries and affiliate, before conversion to generally
accepted accounting principles in the United States of America, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over fmancial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and on the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of the Company and the consolidated financial
position of the Company and its subsidiaries as of December 31, 2004 and 2003,
and the results of operations and cash flows - of the Company and on a
consolidated basis - for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in Israel.
As explained in Note 2(1), the fmancial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The fmancial statements for dates and reporting periods ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the consolidated
fmancial position as of December 31, 2004 and on the consolidated results of
operation for the year then ended is summarized in Note 28.
As described in Note 2 (15) to the financial statements the 2002 and 2003 annual
financial statements have been restated due to an expense paid by a controlling
party for the Company to a third party.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of
Deloitte Touche Tohmatsu
Tel Aviv, March 9, 2005
F-126
[Letterhead of Brightman Almagor & Co.,
a Member Firm of Deloitte Touche Tohmatsu]
Report of Independent Registered Public Accounting Firm To The
Shareholders of
Tadiran Electronic System Ltd.
We have audited the accompanying balance sheets of Tadiran Electronic System
("the Company") as of December 31, 2005 and 2004 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2005. These financial statements
are the responsibility of the Company's Board of Directors and of its
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations, changes in its shareholders'
equity and its cash flows for the three years, in the period ended December 31,
2005, in conformity with generally accepted accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 16 to the financial statements.
As explained in Note 2A, the financial statements are presented in U.S. dollars.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
February 15, 2006
F-127
[Letterhead of Brightman Almagor & Co.,
a Member Firm of Deloitte Touche Tohmatsu]
Report of Independent Registered Public Accounting Firm To The
Shareholders of
Tadiran Spectralink Ltd.
We have audited the accompanying balance sheets of Tadiran Sprectralink Ltd.
("the Company") as of December 31, 2005 and 2004 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2005. These financial statements
are the responsibility of the Company's Board of Directors and of its
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations, changes in its shareholders'
equity and its cash flows for the three years, in the period ended December 31,
2005, in conformity with generally accepted accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 22 to the financial statements.
As explained in Note 2A, the financial statements are presented in U.S. dollars.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
February 15, 2006
F-128
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Microwave Networks, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Microwave
Networks, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microwave Networks,
Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
any effect on the results of operations, stockholders' equity and cash flows for
the years ended December 31, 2005 and 2004.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.
New York, New York
February 3, 2006, except for the Note 6,
as to which the date is March 13, 2006
F-129
[Letterhead of Brightman Almagor & Co.,
a Member Firm of Deloitte Touche Tohmatsu]
Report Of Independent Registered Public Accounting Firm
To the Shareholders of
Koorshevel Ltd.
We have audited the accompanying balance sheets of Koorshevel (the "Company") as
of December 31, 2005 and 2004 and the related statements of operations
shareholders' equity, for each of the three years, in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and 2004, and the results of operations and the changes
in shareholders' equity of the Company for each of the three years in the period
ended December 31, 2005, in conformity with accounting principles generally
accepted in Israel.
As explained in Note 2, the financial statements for dates and reporting periods
subsequent to December 31, 2003 are stated in "reported amounts", in accordance
with the accounting standards of the Israel Accounting Standards Board. The
financial statements for the year ended at December 31, 2003, have been prepared
on the basis of historical cost adjusted for changes in the Consumer price
index, in accordance with pronouncements of the Institute of Certified Public
Accountants is Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (U.S. GAAP). The effect of the application of the latter on the
financial positions as of December 31, 2005 and on the results of operations for
the year then ended is summarized in Note 8.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, March 13, 2006
F-130
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member and Board of Directors
Tadiran Electronic Industries, LLC
We have audited the accompanying balance sheets of Tadiran Electronic
Industries, LLC (formerly Tadiran Electronic Industries, Inc.) as of December
31, 2005 and 2004, and the statements of operations, member's equity, and cash
flows for the year ended December 31, 2005 and the consolidated statements of
operations, member's equity and cash flows for the years ended December 31, 2004
and 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tadiran Electronic Industries,
LLC as of December 31, 2004, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information on pages 11
through 12 is presented for the purpose of additional analysis rather than to
present the financial position and results of operations of the individual
companies, and is not a required part of the basic financial statements. This
additional information is the responsibility of the Company's management. Such
information has been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic financial statements
taken as a whole.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
any effect on the results of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2005.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.
New York, New York
February 8, 2006
F-131
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
TELRAD CONNEGY COMMUNICATIONS INC.
We have audited the accompanying consolidated balance sheet of Telrad
Connegy Communications Inc. ("the Company") and its subsidiaries as of December
31, 2004 and 2003 and the related consolidated statements of operations in
shareholders' equity (deficiency) and the consolidated cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2004, and 2003 and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States, which differ in certain
respects from those followed in Israel, as described in Note 14 to the
consolidated financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 27, 2005 A Member of Ernst & Young Global
F-132
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TADIRAN COMMUNICATIONS LTD.
We have audited the consolidated balance sheet of Tadiran
communications Ltd. ("the Company") and its subsidiaries as of December 31, 2005
(not presented separately herein), and its condensed consolidated statement of
operation. This balance sheet and condensed consolidated statement of operation
are the responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet and condensed consolidated statement of
operation based on our audit. We did not audit the balance sheet and condensed
statement of operation of a certain subsidiary (Talla-Com, Tallahassee
Communications Industries, Inc.), whose assets included in consolidation
constitute approximately 9.3% of total consolidated assets as of December 31,
2005. The balance sheet and condensed consolidated statement of operation of
this subsidiary was audited by other independent auditors, whose report has been
furnished to us, and our opinion, insofar as it relates to amounts included for
this certain subsidiary, is based solely on the report of the other independent
auditors.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other independent
auditors, the consolidated balance sheet and condensed consolidated statement of
operation referred to above presents fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and the condensed consolidated result of operations, in
conformity with generally accepted accounting principles in Israel, which differ
in certain respects from accounting principles generally accepted in the United
States (see Note 31 to the consolidated financial statements).
Without qualifying our opinion, we draw attention to the matter
discussed in Note 31h to the financial statements regarding the restatement of
the financial statements for the year ended December 31, 2005 in order to
retroactively reflect the effect of creating a tax reserve in respect of
earnings of an approved enterprise.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 5, 2006 A Member of Ernst & Young Global
Except for note 31, as to
which the date is May 9, 2006
F-133
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TADIRAN COMMUNICATIONS LTD.
We have audited the consolidated balance sheet of Tadiran
communications Ltd. ("the Company") and its subsidiaries as of December 31, 2004
(not presented separately herein.) This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit. We did not audit the balance sheet of a
certain subsidiary, whose assets included in consolidation constitute
approximately 7% of total consolidated assets as of December 31, 2004. The
balance sheet of this subsidiary was audited by other independent auditor, whose
report has been furnished to us, and our opinion, insofar as it relates to
amounts included for this certain subsidiary, is based solely on the report of
the other independent auditors.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other independent
auditors, the consolidated balance sheet referred to above presents fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2004, in conformity with generally accepted
accounting principles in Israel, which differ in certain respects from
accounting principles generally accepted in the United States (see Note 32 to
the consolidated financial statements).
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 20, 2006 A Member of Ernst & Young Global
F-134
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and Board of Directors
Talla-Com, Tallahassee Communications Industries, Inc.
We have audited the accompanying consolidated balance sheets of Talla-Com,
Tallahassee Communications Industries, Inc. and Subsidiaries as of December 31,
2005 and 2004, and the related consolidated statements of operations and
retained earnings and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Talla-Com, Tallahassee Communications Industries, Inc. and Subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash
flows for the years then needed, in conformity with accounting principles
generally accepted in the United States of America.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
any effect on the results of operations, shareholder's equity and cash flows for
the years ended December 31, 2005 and 2004.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.
New York, New York
January 20, 2006
F-135
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
KOOR TRADE LTD.
We have audited the accompanying consolidated balance sheets of Koor
Trade Ltd. ("the Company") and its subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2005 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of certain subsidiaries
(Agroreg PTY Limited, Koor Inter Trade (Asia) PTY Limited, SKY LINK Ltd. Zagreb,
Star Medical Technology Company Limited, Advance Medical Esthetics (Thailand)
Company Limited, Astracom Networks Company Limited, Agrostar Technology Limited,
Astraco (Thailand) Limited, Trezor sp. z.o.o. Ltd.), whose assets included in
consolidation constitute approximately 27% and 40% of total consolidated assets
as of December 31, 2005 and 2004, and whose revenues included in consolidation
constitute approximately 34%, 12% and 46% of total consolidated revenues for the
years ended December 31, 2005, 2004 and 2003 respectively. The financial
statements of these companies, presented in accordance with generally accepted
accounting principles other than Israel generally accepted accounting principles
and including reconciliation to United States generally accepted accounting
principles, were audited by other auditors whose reports, have been furnished to
us, and our opinion, insofar as it relates to the amounts utilized by Company's
management (before reconciliation to Israel generally accepted accounting
principles), is based solely on the reports of the other auditors.
We did not audit the financial statements of a certain company (Balton CP
Limited) the investment in which based on the equity method of accounting,
amounted to NIS 12.3 million and NIS 43.1 million as of December 31, 2005 and
2004, respectively, and the Company's equity in its income (losses) amounted to
NIS (33.7) million, NIS 8.8 million and NIS 1.7 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The financial statements of
Balton CP Limited, presented in accordance with accounting principles generally
accepted in the United States, were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
utilized by Company's management (before reconciliation to Israel generally
accepted accounting principles), is based solely on the reports of the other
auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts (including the Company's reconciliation of the financial
statements of the aforementioned certain Companies to Israel generally accepted
accounting principles) and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of
their operations and its cash flows for each of the three years in the period
ended of December 31, 2005, in conformity with Israel generally accepted
accounting principles, which differ in certain respects from those followed in
the United States, as described in Note 22 to the financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 21, 2006 A Member of Ernst & Young Global
F-136
[Letterhead of Einfeld Symonds Vince]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF AGROREG PTY LIMITED
We have audited the accompanying balance sheets of Agroreg Pty Limited
("the Company") as of December 31, 2005 and the related statement of operation
and cash flow, for the nine months period ended December 31, 2005. The financial
statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and the results of its operations and its cash flows for the
financial period ended December 31, 2005, in conformity with Australia's
generally accepted accounting principles which differ in certain respects from
those followed in the United States, as described in Note 1 to the financial
statements.
Dated at Sydney the 1st day of February 2006
/s/ Einfeld Symonds Vince
Einfeld Symonds Vince
Chartered Accountants
/s/ Christopher Kirkwood
CHRISTOPHER KIRKWOOD
Partner
F-137
[Letterhead of Einfeld Symonds Vince]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF KOOR INTER-TRADE (ASIA)
PTY LIMITED AND ITS SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Koor
Inter-Trade (Asia) Pty Limited ("the Company") and its subsidiaries as at
December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, the last of which ended December 31, 2005 (not presented separately
herein). These financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2005 and 2004 and the
consolidated results of their operations, and their cash flows for each of the
three years, the last of which ended December 31, 2005, in conformity with
Australia's generally accepted accounting principles which differ in certain
respects from those following in the United States, as described in Note 1 to
the consolidated financial statements.
Dated at Sydney the 25th day of January 2006
/s/ Einfeld Symonds Vince
EINFELD SYMONDS VINCE
Chartered Accountants
/s/ Chris Kirkwood
CHRIS KIRKWOOD
Partner
F-138
[Letterhead of Revizija Zagreb Ltd Zagreb]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of SKY LINK Ltd Zagreb
1. We have audited the accompanying balance sheets of SKY LINK Ltd Zagreb,
("the Company") as of December 31, 2005 and as of December 31, 2004,
and the related statements of operations, changes in shareholders'
equity and cash flows for each of three years in the period ended
December 31, 2005 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
2. We conducted our audits in accordance with the standards of Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the company's
internal control over financial reporting. An audit includes
consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
3. In our opinion based on our audits, the financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2005 and as of December 31,
2004, and the results of its operations and cash flows for each the
three years in the period ended December 31, 2005, in conformity with
Generally Accepted Accounting Principles applied in the United States
of America.
Yours truly,
/s/ Revizija Zagreb Ltd Zagreb
Revizija Zagreb Ltd Zagreb
Zagreb, January 25, 2006
F-139
[Letterhead of ASV & Associates Limited]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the shareholders of
Star Medical Technology Company Limited
We have audited the accompanying balance sheets of Star Medical Technology
Company Limited as of 31 December 2005 and the related statements of operations,
changes in shareholders' equity and cash flows for the year ended 31 December
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The balance sheet of Star Medical Technology
Company Limited as of 31 December 2004 and related statements of operations,
changes in shareholders' equity and cash flows as from 27 July 2004 (date of
incorporation) to 31 December 2004, as presented herein for comparative
purposes, were audited by other auditors, whose reports dated 5 March 2005 and
20 January 2006 expressed an unqualified opinion on those financial statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Star Medical
Technology Company Limited as of 31 December 2005 and the results of their
operations and cash flows for the year ended 31 December 2005 in conformity with
Thailand generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 3 to the
financial statements.
/s/ Kwunjai Kiatgungwalgri
Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875
Bangkok
20 January 2006
F-140
[Letterhead of ASV & Associates Limited]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the shareholders of
Advance Medical Esthetics (Thailand) Company Limited
We have audited the accompanying balance sheets of Advance Medical Esthetics
(Thailand) Company Limited as of 31 December 2005 and the related statements of
operations, changes in shareholders' equity and cash flows for the period as
from 20 January 2005 (the date of incorporation) to 31 December 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Advance
Medical Esthetics (Thailand) Company Limited as of 31 December 2005, and the
results of their operations and cash flows for the period as from 20 January
2005 (the date of incorporation) to 31 December 2005, in conformity with
Thailand generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 3 to the
financial statements.
/s/ Kwunjai Kiatgungwalgri
Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875
Bangkok
20 January 2006
F-141
[Letterhead of ASV & Associates Limited]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the shareholders of
Astracom Networks Company Limited
We have audited the accompanying balance sheets of Astracom Networks Company
Limited as of 31 December 2005 and the related statements of operations, changes
in shareholders' equity and cash flows for the year ended 31 December 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The balance sheet of Astracom Networks Company Limited as of 31
December 2004 and related statements of operations, changes in shareholders'
equity and cash flows for each of the two years in the period ended 31 December
2004, as presented herein for comparative purposes, were audited by other
auditors, whose reports dated 5 March 2005 and 20 January 2006 expressed an
unqualified opinion on those financial statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Astracom
Networks Company Limited as of 31 December 2005 and the results of their
operations and cash flows for the year ended 31 December 2005 in conformity with
Thailand generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 3 to the
financial statements.
/s/ Kwunjai Kiatgungwalgri
Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875
Bangkok
20 January 2006
F-142
[Letterhead of ASV & Associates Limited]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the shareholders of
Agrostar Technology Limited
(Formerly Agrostar Limited)
We have audited the accompanying balance sheets of Agrostar Technology Limited
as of 31 December 2005 and 2004 and the related statements of operations,
changes in shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The related statements of operations, changes in shareholders'
equity and cash flows for the period as from 25 June 2003 (the date of
incorporation) to 31 December 2003 of Agrostar Technology Limited, as presented
herein for comparative purposes, were audited by other auditors, whose reports
dated 27 February 2004 and 20 January 2006 expressed an unqualified opinion on
those financial statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Agrostar
Technology Limited as of 31 December 2005 and 2004 and the results of their
operations and cash flows for the years then ended in conformity with Thailand
generally accepted accounting principles, which differ in certain respects from
those followed in the United States, as described in Note 3 to the financial
statements.
/s/ Kwunjai Kiatgungwalgri
Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875
Bangkok
20 January 2006
F-143
[Letterhead of ASV & Associates Limited]
REPORT OF CERTIFIED PUBLIC ACCOUNTANT
To the shareholders of
Astraco (Thailand) Limited
We have audited the accompanying consolidated and company balance sheets of
Astraco (Thailand) Limited as of 31 December 2005, and the related consolidated
and company statements of operations, changes in shareholders' equity and cash
flows for the year ended 31 December 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated and
company balance sheets of Astraco (Thailand) as of 31 December 2004 and related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the two years in the period ended 31 December 2004, as
presented herein for comparative purposes, were audited by other auditors, whose
reports dated 3 March 2005 and 20 January 2006 expressed an unqualified opinion
on those financial statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiary as of 31 December 2005, and the
consolidated results of their operations and cash flows for the year ended 31
December 2005, in conformity with Thailand generally accepted accounting
principles, which differ in certain respects from those followed in the United
States, as described in Note 3 to the financial statements.
/s/ Kwunjai Kiatgungwalgri
Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875
Bangkok
20 January 2006
F-144
[Letterhead of ELMA-POLAUDIT SP, Z.O.O.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Trezor sp. z.o.o. LTD.
We have audited the accompanying balance sheets of Trezor sp. z.o.o.
Ltd. Company (the "Company") as at December 31, 2005 and the related statements
of operations in shareholder's equity and cash flows, for the period started in
May and ended December 31, 2005. These financial statements are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and the results of their operations and their cash flows
for the period started in May and ended December 31, 2005, in conformity with
accounting principles generally in the United States.
Signed /s/ Krzysztof Burnos
Partner name: KRZYSZTOF BURNOS
Firm name: ELMA-POLAUDIT SP. Z.O.O.
Country: POLAND
Date: FEBRUARY 20, 2006
F-145
[Letterhead of Blick Rothenberg, Chartered Accountants]
Report of Independent Registered Accounting Firm to the Shareholders of
Balton CP Limited
We have audited the accompanying consolidated balance sheets of Balton CP
Limited ("the company") at December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the three-year period ended December 31,
2005. These consolidated financial statements are the responsibility of the
company's Board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the company
and its subsidiary undertakings as at December 31, 2005 and 2004 and the results
of its operations and its cash flows for each of the three years in the
three-year period ended of December 31, 2005, in conformity with accounting
principles generally accepted in United States.
/s/ Blick Rothenberg
Blick Rothenberg
Chartered Accountants
London, England
21 March 2006
F-146
Makhteshim-Agan Industries Ltd.
Financial Statements as at December 31, 2005
--------------------------------------------------------------------------------
Contents
Page
Auditors' Report F-148
Consolidated Balance Sheets F-149
Company Balance Sheets F-151
Consolidated Statements of Income F-152
Company Statements of Income F-153
Statements of Changes in Shareholders' Equity F-154
Consolidated Statements of Cash Flows F-156
Company Statements of Cash Flows F-158
Notes to the Financial Statements F-160
Appendix to the Financial Statements - Schedule of Investee Companies F-236
F-147
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
Report of Independent Registered Public Accounting Firm
The Shareholders of Makhteshim-Agan Industries Ltd.
We have audited the accompanying balance sheets of Makhteshim-Agan Industries
Ltd. (hereinafter - "the Company") as at December 31, 2005 and 2004, and the
consolidated balance sheets of the Company and its subsidiaries (hereinafter -
the "consolidated") as at such dates, and the related statements of income,
changes in shareholders' equity and cash flows - Company and consolidated - for
each of the years in the three year period ended December 31, 2005. These
financial statements are the responsibility of the Company's Board of Directors
and its Management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, which
statements constituting 3.3% and 5% of the total consolidated assets as at
December 31, 2005 and 2004, respectively, and total revenues constituting 3.4%,
(4)% and (6)% of the total consolidated revenues for each of the years in the
three year period ended December 31, 2005, respectively. The financial
statements of those subsidiaries were audited by other auditors whose reports
have been furnished to us and our opinion, insofar as it relates to the amounts
included for those companies, is based solely on such reports of the other
auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's Board of Directors and by its
Management, as well as evaluating the overall financial-statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and on the reports of other auditors, the
financial statements referred to above present fairly, all material respects,
the financial position of the Company and the consolidated financial position of
the Company and its subsidiaries, as at December 31, 2005 and 2004, and their
results of the operations, the changes in the shareholders' equity and their
cash flows - Company and consolidated - for each of the years in the three year
period ended December 31, 2005, in conformity with generally accepted accounting
principles in Israel. Furthermore, in our opinion, these statements are prepared
in accordance with the Securities Regulations (Preparation of Annual Financial
Statements), 1993.
Accounting Principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 34 of the financial statements.
As explained in Note 2A., these financial statements are prepared in U.S.
dollars, which the company has designated as its functional currency.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel-Aviv, Israel
March 8, 2006
F-148
Consolidated Balance Sheets
---------------------------------------------------------------------------------------------
As at December 31
--------------------------------
2005 2004
-------------- ---------------
Note US$ thousands US$ thousands
--------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents 71,293 40,477
Short-term investments 1,269 1,563
Trade receivables 3 383,246 369,209
Other receivables 4 86,414 77,219
Inventories 6 566,416 460,870
------------- -------------
1,108,638 949,338
------------- -------------
Long-term investments, loans and receivables 8 22,684 22,070
Fixed assets 9
Cost 884,480 824,544
Less - accumulated depreciation 421,114 388,805
------------- -------------
463,366 435,739
------------- -------------
Other long-term assets and deferred expenses 10
Cost 812,516 743,310
Less - accumulated amortization 277,462 215,890
------------- -------------
535,054 527,420
------------- -------------
------------- -------------
2,129,742 1,934,567
============= =============
F-149
Makhteshim-Agan Industries Ltd.
--------------------------------------------------------------------------------------------------------
As at December 31
--------------------------------
2005 2004
-------------- ---------------
Note US$ thousands US$ thousands
--------------------------------------------------------------------------------------------------------
Current liabilities
Credit from banks 11 248,038 140,021
Trade payables 12 338,598 325,945
Other payables 13 197,173 192,405
Proposed dividend payable 14,058 11,200
-------------- ---------------
797,867 669,571
-------------- ---------------
Long-term liabilities
Loans from banks 14 35,584 93,023
Convertible debentures 15 - 150,000
Other long-term liabilities 16 4,314 9,337
Deferred taxes, net 17 59,801 54,354
Employee severance benefits, net 18 28,014 26,709
-------------- ---------------
127,713 333,423
-------------- ---------------
Minority interest 28,586 18,756
-------------- ---------------
Commitments and contingent liabilities 19
Convertible debentures 15 40,479 38,322
-------------- ---------------
Shareholders' equity 21 1,135,097 874,495
-------------- ---------------
-------------- ---------------
2,129,742 1,934,567
============== ===============
/s/ Danny Biran /s/ Shlomo Yanai /s/ Eli Assraf
---------------------------------- ---------------------------------- ---------------------------
Danny Biran Shlomo Yanai Eli Assraf
Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer
Approval date of the financial statements: March 8, 2006
The notes and appendix to the financial statements are an integral part thereof.
F-150
Makhteshim-Agan Industries Ltd.
Company Balance Sheets
----------------------------------------------------------------------------------------------------------
As at December 31
--------------------------------
2005 2004
-------------- ---------------
Note US$ thousands US$ thousands
----------------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents 8,837 2,649
Short-term investments - 1,900
Other receivables 4 14,613 11,699
Loans to investee companies 5 39,880 30,959
-------------- ---------------
63,330 47,207
-------------- ---------------
Long-term investments, loans and receivables
Investee companies 7 1,171,531 1,008,999
Bank deposits 8 19,176 19,016
Deferred taxes, net 17 7,234 6,674
-------------- ---------------
1,197,941 1,034,689
-------------- ---------------
Office furniture and equipment, net 769 601
-------------- ---------------
Deferred expenses 10 346 2,458
-------------- ---------------
1,262,386 1,084,955
============== ===============
Current liabilities
Credit from banks 11 59,000 -
Other payables 13 9,887 6,760
Proposed dividend payable 14,200 11,200
-------------- ---------------
83,087 17,960
-------------- ---------------
Long-term liabilities
Convertible debentures 15 - 150,000
Employee severance benefits, net 18 4,136 4,591
-------------- ---------------
4,136 154,591
-------------- ---------------
Commitments and contingent liabilities 19
Convertible debentures 15 40,066 37,909
-------------- ---------------
Shareholders' equity 21 1,135,097 874,495
-------------- ---------------
1,262,386 1,084,955
============== ===============
/s/ Danny Biran /s/ Shlomo Yanai /s/ Eli Assraf
---------------------------------- --------------------------- -----------------------------
Danny Biran Shlomo Yanai Eli Assraf
Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer
Approval date of the financial statements: March 8, 2006
The notes and appendix to the financial statements are an integral part thereof.
F-151
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Income
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
---------------------------------------------------
2005 2004 2003
-------------- --------------- ----------------
Note US$ thousands US$ thousands US$ thousands
--------- -------------- --------------- ----------------
Revenues 23 1,740,717 1,539,702 1,177,255
Cost of sales 24 1,059,715 943,908 730,305
-------------- --------------- ----------------
Gross profit 681,002 595,794 446,950
-------------- --------------- ----------------
Expenses
Research and development, net 25 20,628 19,480 16,820
Selling and marketing 26 267,918 220,212 163,836
General and administrative 27 61,386 66,915 53,899
-------------- --------------- ----------------
349,932 306,607 234,555
-------------- --------------- ----------------
Operating income 331,070 289,187 212,395
Financing expenses, net 28 34,573 27,571 37,956
-------------- --------------- ----------------
Income before other expenses, net 296,497 261,616 174,439
Other expenses, net 29 44,211 42,735 38,245
-------------- --------------- ----------------
Income before taxes on income 252,286 218,881 136,194
Taxes on income 17 39,952 52,334 32,618
-------------- --------------- ----------------
Income after taxes on income 212,334 166,547 103,576
Minority interest in income of
subsidiaries, net (4,816) (1,020) (802)
-------------- --------------- ----------------
Income from continuing operations 207,518 165,527 102,774
Cumulative effect as at beginning of the
year of change in accounting method 2(R) (2,025) - -
-------------- --------------- ----------------
Net income 205,493 165,527 102,774
============== =============== ================
US$ US$ US$
-------------- --------------- ----------------
Earnings per share 31
Basic earnings per share of NIS 1 par value 0.44 0.39 0.26
============== =============== ================
Fully diluted earnings per share of NIS 1
par value 0.44 0.37 0.25
============== =============== ================
The notes and appendix to the financial statements are an integral part thereof.
F-152
Makhteshim-Agan Industries Ltd.
Company Statements of Income
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
---------------------------------------------------
2005 2004 2003
-------------- --------------- ----------------
Note US$ thousands US$ thousands US$ thousands
------------- -------------- --------------- ----------------
Income
Company's equity in income of investee
companies, net 217,362 163,406 104,015
Management fees from investee companies 14,208 13,559 10,007
-------------- --------------- ----------------
231,570 176,965 114,022
-------------- --------------- ----------------
Expenses
Research and development, net - - 401
General and administrative 27 12,990 15,371 13,927
-------------- --------------- ----------------
12,990 15,371 14,328
-------------- --------------- ----------------
Operating income 218,580 161,594 99,694
Financing expenses (income), net 28 9,055 (5,036) (598)
-------------- --------------- ----------------
Income before other expenses 209,525 166,630 100,292
Other expenses (income), net 6 1,850 (4)
-------------- --------------- ----------------
Income before taxes on income 209,519 164,780 100,296
Taxes on income 17 4,026 (747) (2,478)
-------------- --------------- ----------------
Net income 205,493 165,527 102,774
============== =============== ================
US$ US$ US$
-------------- --------------- ----------------
Earnings per share 31
Basic earnings per share of NIS 1 par value 0.44 0.39 0.26
============== =============== ================
Fully diluted earnings per share of NIS 1
par value 0.44 0.37 0.25
============== =============== ================
The notes and appendix to the financial statements are an integral part thereof.
F-153
Makhteshim-Agan Industries Ltd.
Statements of Changes in Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------
Receipts from
Share Premium issuance of Capital
capital on shares options reserves
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Balance as at December 31, 2002 101,804 357,324 4,046 (7,279)
Employee options exercised 581 (581) - -
Conversion of convertible debentures into shares 1,270 11,331 - -
Options exercised 138 1,469 (134) -
Adjustments deriving from translation of
financial statements of investee companies - - - 1,886
Dividend - - - -
Proposed dividend payable - - - -
Dividend proposed subsequent to the balance sheet date - - - -
Net income for the year ended December 31, 2003 - - - -
------------- ------------- ------------- -------------
Balance as at December 31, 2003 103,793 369,543 3,912 (5,393)
Employee options exercised 578 (578) - -
Conversion of convertible debentures into shares 3,974 35,581 - -
Options exercised 913 9,637 (903) -
Adjustments deriving from translation of
financial statements of investee companies - - - 2,825
Realization of treasure stoke (see
Note 21C) - 3,304 - -
Dividend - - - -
Proposed dividend payable - - - -
Dividend proposed subsequent to the balance sheet date - - - -
Net income for the year ended December 31, 2004 - - - -
------------- ------------- ------------- -------------
Balance as at December 31, 2004 109,258 417,487 3,009 (2,568)
[Table continued - Statements of Changes]
Dividend
proposed Company shares
subsequent held by the
to the balance Retained Company and
sheet date earnings by a subsidiary Total
-------------- -------------- --------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
-------------- -------------- --------------- --------------
Balance as at December 31, 2002 9,500 157,940 (15,428) 607,907
Employee options exercised - - - -
Conversion of convertible debentures into shares - - - 12,601
Options exercised - - - 1,473
Adjustments deriving from translation of
financial statements of investee companies - - - 1,886
Dividend (9,500) (16,600) - (26,100)
Proposed dividend payable - (7,000) - (7,000)
Dividend proposed subsequent to the balance sheet date 7,200 (7,200) - -
Net income for the year ended December 31, 2003 - 102,774 - 102,774
-------------- -------------- --------------- --------------
Balance as at December 31, 2003 7,200 229,914 (15,428) 693,541
Employee options exercised - - - -
Conversion of convertible debentures into shares - - - 39,555
Options exercised - - - 9,647
Adjustments deriving from translation of
financial statements of investee companies - - - 2,825
Realization of treasure stoke (see
Note 21C) - - 4,196 7,500
Dividend (7,200) (25,700) - (32,900)
Proposed dividend payable - (11,200) - (11,200)
Dividend proposed subsequent to the balance sheet date 12,700 (12,700) - -
Net income for the year ended December 31, 2004 - 165,527 - 165,527
-------------- -------------- --------------- --------------
Balance as at December 31, 2004 12,700 345,841 (11,232) 874,495
F-154
Makhteshim-Agan Industries Ltd.
Statements of Changes in Shareholders' Equity (cont'd)
----------------------------------------------------------------------------------------------------------------------
Receipts from
Share Premium issuance of Capital
capital on shares options reserves
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Balance as at December 31, 2004 109,258 417,487 3,009 (2,568)
Employee options exercised 416 (416) - -
Conversion of convertible debentures into shares 7,807 138,852 - -
Options exercised 2,910 31,014 (3,009) -
Adjustments deriving from translation of
financial statements of investee companies - - - (2,701)
Realization of treasury stoke (see Note 21C) - 2,324 - -
Acquisition of Company shares (see Note 21D) - - - -
Tax benefit from options to employees - - - 1,554
Dividend - - - -
Dividend proposed subsequent to the balance sheet date - - - -
Net income for the year ended December 31, 2005 - - - -
------------- ------------- ------------- -------------
Balance as at December 31, 2005 120,391 589,261 - (3,715)
------------- ------------- ------------- -------------
Table - continued
Proposed
dividend Company shares
subsequent held by the
to balance Retained Company and by
sheet date earnings a subsidiary Total
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Balance as at December 31, 2004 12,700 345,841 (11,232) 874,495
Employee options exercised - - - -
Conversion of convertible debentures into shares - - - 146,659
Options exercised - - - 30,915
Adjustments deriving from translation of
financial statements of investee companies - - - (2,701)
Realization of treasury stoke (see Note 21C) - - 1,524 3,848
Acquisition of Company shares (see Note 21D) - - (65,661) (65,661)
Tax benefit from options to employees - - - 1,554
Dividend (12,700) (46,805) - (59,505)
Dividend proposed subsequent to the balance sheet date 23,500 (23,500) - -
Net income for the year ended December 31, 2005 - 205,493 - 205,493
------------- ------------- ------------- -------------
Balance as at December 31, 2005 23,500 481,029 (75,369) 1,135,097
------------- ------------- ------------- -------------
The notes and appendix to the financial statements are an integral part thereof.
F-155
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Cash flows from operating activities
Net income 205,493 165,527 102,774
Adjustments to reconcile net income to net cash flows
from operating activities (see A. below) (22,335) 50,126 146,466
------------- ------------- -------------
Net cash provided by operating activities 183,158 215,653 249,240
------------- ------------- -------------
Cash flows from investing activities
Acquisition of fixed assets (50,415) (38,823) (33,606)
Investment grant received 1,226 686 1,937
Additions to other assets (38,270) (33,749) (20,463)
Purchase of products and intangible assets - - (50,876)
Short-term investments, net 194 (463) (241)
Investments in newly consolidated companies (see B. below) (8,882) (72,152) (3,282)
Proceeds from disposal of fixed and other assets 334 574 2,049
Proceeds from sale of long-term investments - 2,819 406
Other long-term investments - (828) (2,963)
Acquisition of minority interest in subsidiaries (970) (1,056) -
------------- ------------- -------------
Net cash used in investing activities (96,783) (142,992) (107,039)
------------- ------------- -------------
Cash flows from financing activities
Receipt of long-term loans from banks 3,846 24,700 97,693
Repayment of long-term loans and liabilities from banks
and others (85,075) (227,851) (148,251)
Issuance of convertible debentures less issuance expenses - 147,450 -
Realization of Company debentures by a subsidiary - - 4,301
Increase (decrease) in short-term credit from banks and
others, net 119,457 4,222 (84,801)
Proceeds from options exercised 30,915 9,647 1,473
Acquisition of Company shares (65,661) - -
Dividend to shareholders (56,647) (39,900) (26,100)
Dividend to minority shareholders in subsidiaries (2,394) (301) (241)
------------- ------------- -------------
Net cash used in financing activities (55,559) (82,033) (155,926)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 30,816 (9,372) (13,725)
Cash and cash equivalents at beginning of the year 40,477 49,849 63,574
------------- ------------- -------------
Cash and cash equivalents at end of the year 71,293 40,477 49,849
============= ============= =============
The notes and appendix to the financial statements are an integral part thereof.
F-156
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Cash Flows (cont'd)
--------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
A. Adjustments to reconcile net income to net
cash flows from operating activities:
Revenues and expenses not affecting operating cash flows
Depreciation and amortization 95,964 82,624 75,673
Adjustment of long-term liabilities to banks and others (1,127) 1,791 2,537
Minority interest in income of subsidiaries, net 4,816 1,020 802
Increase in employee severance benefits, net 1,533 1,973 4,358
Deferred taxes, net 7,830 (163) 3,233
Amortization of discount on convertible debentures 497 916 978
Capital loss on disposal of fixed and other assets, net 1,665 511 858
Provision for loss with respect to options granted to
employees of subsidiaries 55 2,090 330
Gain on issuance of a subsidiary to a third party - (926) -
Changes in operating assets and liabilities
Increase in trade and other receivables (17,076) (53,236) (48,358)
Increase in inventories (84,322) (69,345) (15,323)
Increase (decrease) in trade and other payables (32,170) 82,871 121,378
------------- ------------- -------------
(22,335) 50,126 146,466
============= ============= =============
B. Investments in newly consolidated companies
Working capital (excluding cash and cash equivalents) (7,158) (6,485) (2,777)
Fixed assets, net (2,040) (2,258) (506)
Other assets, net (8,027) (63,081) -
Goodwill created on acquisition (5,264) (41,851) (43)
Long-term liabilities 1,240 33,896 44
Exercise of Company shares held by a subsidiary 3,848 7,500 -
Minority interest 8,519 6,398 -
------------- ------------- -------------
(8,882) (65,881) (3,282)
============= ============= =============
Repayment of liability in respect of investee company
previously acquired - (6,271) -
------------- ------------- -------------
(8,882) (72,152) (3,282)
============= ============= =============
C. Non-cash activities
Acquisition of other assets 22,448 6,287 1,516
============= ============= =============
Acquisition of fixed assets on supplier credit 13,029 - 3,904
============= ============= =============
Acquisition of subsidiary shares in exchange for
Company shares 3,848 - -
============= ============= =============
F-157
Makhteshim-Agan Industries Ltd.
Company Statements of Cash Flows
---------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Cash flows from operating activities
Net income 205,493 165,527 102,774
Adjustments to reconcile net income to cash flows from
operating activities (see A. below) (165,918) (130,946) (67,443)
------------- ------------- -------------
Net cash provided by operating activities 39,575 34,581 35,331
------------- ------------- -------------
Cash flows from investing activities
Investment in investee companies (2,313) (3,938) (5,501)
Long-term loans to investee companies (4,669) (135,582) (326)
Repayment of long-term loans to investee companies - - 21,623
Short-term credit to investee companies, net 5,181 (9,056) 2,850
Acquisition of fixed assets (400) (431) (221)
Investment in short-term bank deposits, net - 3,554 3,687
Realization of long-term bank deposits 1,900 10,000 25,000
Proceeds from sales of fixed assets - 8 10
------------- ------------- -------------
Net cash provided by (used in) investing activities (301) (135,445) 47,122
------------- ------------- -------------
Cash flows from financing activities
Issuance of convertible debentures less issuance expenses - 147,450 -
Proceeds from options exercised 30,915 9,647 1,473
Dividend to shareholders (57,340) (39,900) (26,100)
Acquisition of Company shares (65,661) - -
Repayment of long-term loans from banks - (16,875) (4,500)
Increase (decrease) in short-term credit from banks, net 59,000 - (50,684)
------------- ------------- -------------
Net cash provided by (used in) financing activities (33,086) 100,322 (79,811)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 6,188 (542) 2,642
Cash and cash equivalents at beginning of the year 2,649 3,191 549
------------- ------------- -------------
Cash and cash equivalents at end of the year 8,837 2,649 3,191
============= ============= =============
The notes and appendix to the financial statements are an integral part thereof.
F-158
Makhteshim-Agan Industries Ltd.
Company Statements of Cash Flows (cont'd)
--------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
A. Adjustments to reconcile net income to net
cash flows from operating activities
Revenues and expenses not affecting operating cash flows:
Depreciation and amortization 663 1,235 741
Capital loss (gain) on disposal of fixed assets 6 25 (4)
Equity in operating results net of dividend received
in cash (153,575) (122,931) (74,153)
Increase (decrease) in employee severance benefits, net (455) 680 1,660
Amortization of discount on convertible debentures 497 916 978
Adjustment of long-term investments (160) (5,333) 731
Deferred taxes, net 968 (749) (2,507)
Changes in operating assets and liabilities:
Decrease (increase) in other receivables (17,016) (5,143) 2,362
Increase in other payables 3,154 354 2,749
------------- ------------- -------------
(165,918) (130,946) (67,443)
============= ============= =============
The notes and appendix to the financial statements are an integral part thereof.
F-159
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 1 - General
A. Definitions
(1) The Company - Makhteshim-Agan Industries Ltd.
(2) The Group - Makhteshim-Agan Industries Ltd. and
its investees.
(3) Subsidiaries - Companies, including partnerships,
whose financial statements are
fully consolidated, directly or
indirectly, with the financial
statements of the Company.
(4) Proportionately - Companies, including partnerships,
consolidated whose financial statements are
companies consolidated, directly or
indirectly, with those of the
Company by the proportionate
consolidation method.
(5) Investees - Subsidiaries and proportionately
consolidated companies.
(6) Related parties - As defined in Opinion 29 of the
Institute of Certified Public
Accountants in Israel.
(7) Interested parties - As defined in Paragraph (1) of the
definition of an "interested party"
in a corporation, in Section 1 of
the Securities Law, 1968.
(8) Controlling - As defined in the Securities
Regulations (Financial Statement
Presentation of shareholders
Transactions between a Company and
a Controlling Shareholder Therein),
1996.
(9) CPI - The Consumer Price Index as
published by the Central Bureau of
Statistics.
(10) Dollar - The US dollar.
B. Description of the Company and its activity
1. The Company is engaged through, its local and foreign investee
companies primarily in the manufacture and marketing of
pesticides, intermediate materials for other industries and
synthetic fragrances, mainly for export. The Company is held
by Koor Industries Ltd. (Koor). As at December 31, 2005, Koor
holds 30.33% of the Company's shares whereas on December 31,
2004, Koor held 38.6% of the Company's shares.
The Company was established on December 8, 1997 for the
purpose of executing a plan for implementing changes in the
holdings in Makhteshim Chemical Works Ltd. (Makhteshim) and
Agan Chemical Industries Ltd. (Agan), as described below.
F-160
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 1 - General (cont'd)
B. Description of the Company and its activity (cont'd)
2. On April 26, 1998, the shareholders of Makhteshim and of Agan
approved an exchange arrangement, the substance of which was a
change in the structure of holdings in the Makhteshim-Agan
Group. Prior to the implementation of the arrangement,
Makhteshim was a 67% subsidiary of Koor, Makhteshim held a
46.6% interest in Agan and Koor held a 5% direct interest in
Agan.
On May 4, 1998, the Court approved the arrangement, which was
consummated pursuant to the provisions of Section 233 of the
Companies Ordinance (New Version). On May 7, 1998, the shares
of Makhteshim and of Agan were delisted from the Tel-Aviv
Stock Exchange and on May 11, 1998, trading commenced in the
shares of the Company.
On May 10, 1998, the following actions were taken pursuant to
the approved exchange arrangement:
- The Company issued shares to all of the shareholders of
Makhteshim and of Agan (except in respect of the shares
of Agan held by Makhteshim) in exchange for the
transfer to the Company of the shares of Makhteshim and
Agan held by them.
- Pursuant to the exchange ratio that was determined
based on the opinion of economic appraisers, the
shareholders of Makhteshim received 2.446 shares of
the Company for each share of Makhteshim, and the
shareholders of Agan (excluding Makhteshim) received
10.247 shares of the Company for each share of Agan.
Following the implementation of the above-mentioned
transactions, the Company fully owns and controls Makhteshim
and Agan.
Note 2 - Reporting Principles and Accounting Policy
A. Financial statements in US dollars
General:
The Company and its Israeli subsidiaries maintain their current
accounting records in nominal shekels and dollars using a
multi-currency system. Since most of the Group's revenues are received
in dollar and the principal raw materials and fixed assets are
purchased in dollar, the dollar is the principal currency of the
economic environment in which the Group operates ("the functional
currency"). Accordingly, the dollar is the measurement and reporting
currency in these financial statements. It should not be construed that
the translated amounts actually represent or can be converted into
dollars, unless otherwise indicated in these statements.
F-161
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
A. Financial statements in US dollars (cont'd)
1. Balance sheet:
a) Non-monetary items (items, the stated amounts of
which reflect their historical value upon acquisition
or creation) that were acquired in a currency other
than the dollar, are translated according to the
exchange rate of the dollar on their date of
acquisition or creation. The following items are
treated as non-monetary items: fixed assets and the
related accumulated depreciation, inventory, other
assets, deferred expenses and the related accumulated
amortization, and shareholders' equity items which
derive from funds invested by shareholders.
The amounts of the non-monetary assets do not
necessarily represent their realizable value or
current economic value, rather only the original
dollar cost thereof in nominal values.
b) The net asset value of investments in investees and
the minority interest in consolidated subsidiaries
are determined on the basis of the dollar translated
financial statements of those companies.
c) Monetary items (items, the amounts of which as stated
in the balance sheet reflect current or realizable
values, as at the balance sheet date) are translated
into dollars at the exchange rate at the balance
sheet date.
2. Statement of income:
a) The components of the statement of income reflecting
transactions carried out during the year - sales,
purchases, labor costs, etc. - in a currency other
than the dollar, are translated according to the
exchange rate of the dollar on the date of the cash
flow or balance sheet date, whichever earlier.
Changes in monetary balances denominated in
currencies other than the functional currency arising
from movement in the exchange rates are included in
the specific expense or income items to which they
relate.
b) The components of the statement of income relating to
non-monetary balance sheet items have been translated
according to the same exchange rate used for
translating the related balance sheet items (mainly:
changes in inventory, depreciation and amortization,
capital gains, etc.).
c) The Company's equity in operating results of
investees is determined on the basis of the financial
statements of those companies.
d) Taxes on income:
Current taxes are composed of payments on account
during the year, plus amounts due as at the balance
sheet date (or net of amounts refundable at the
balance sheet date). The payments on account are
translated according to the exchange rate of the
dollar on the date of each payment, while the amounts
due or refundable are included without adjustment.
Therefore, current taxes also include the expense or
income resulting from the erosion of the payments on
account, from the payment date until the balance
sheet date.
Deferred taxes - see Note 2R and Note 17G.
F-162
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
B. Dividend proposed subsequent to the balance sheet date
Pursuant to Accounting Standard No. 7, "Events Occurring Subsequent to
the Balance Sheet Date", a liability which relates to a dividend
proposed or declared subsequent to the balance sheet date, is reflected
in the financial statements only in the period declared. In addition,
separate expression of the amount of the dividend intended for
distribution is provided as part of the statement of changes in
shareholders' equity, as stated, against reduction of the retained
earnings' balance.
C. Foreign investee companies
As of January 1, 2004, the Company applies Accounting Standard No. 13,
"Effect of changes in Exchange Rates of Foreign Currency". The Standard
discusses the translation of transactions in foreign currency and the
translation of financial statements of foreign operations for purposes
of including them in the financial statements of the reporting entity.
The Standard provides principles for classifying foreign operations as
an autonomous foreign investee or as an integrated investee, on the
basis of the indications described in the standard and the use of
discretion, and it provides the method for translating the financial
statements of autonomous foreign investees.
The financial statements of foreign investees that are integral to the
Group's operations based on the criteria provided in Accounting
Standard No. 13, are translated into dollars as follows: non-monetary
items in the balance sheet are translated at the historical exchange
rates as at the transaction date whereas monetary balance sheet items
are translated at the exchange rate in effect on the balance sheet
date. Items in the statement of income are translated at average
exchange rates, except for revenues and expenses, translated using
historical exchange rates due to their relationship to non-monetary
items that are also were translated based on the historical exchange
rates. Translation differences are recorded in the statement of income.
The financial statements of foreign investees that operate as
"autonomous entities" based on the criteria provided in Accounting
Standard No. 13, are translated into dollars as follows: monetary and
non-monetary balance sheet items are translated based on the closing
exchange rate. Commencing from January 1, 2004, a balance of goodwill
created on acquisition of an autonomous investee entity overseas is
treated as an asset of that entity and is translated based on the
closing rate.
Items in the statement of income are translated at the exchange rate on
the transaction date. Translation differences are recorded in the
statement of income in a separate category in the shareholders' equity
section ("adjustments deriving from translation of financial statements
of investee companies") up to the time of realization of the net
investment.
F-163
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
D. Consolidated financial statements
(1) The consolidated financial statements of the group are
prepared in conformity with generally accepted accounting
principles in Israel and include the financial statements of
those companies that it controls. Companies, which are under
joint control are consolidated by the proportionate
consolidation method.
(2) A list of companies whose financial statements are included in
the consolidated statements as well as the rate of control and
ownership thereof, is presented in the appendix to the
financial statements.
(3) For purposes of the consolidation, the amounts appearing in
the financial statements of the subsidiaries were taken into
account, after the adjustments required by the application of
the uniform accounting policies used by the Group.
(4) The excess of the cost of investments in subsidiaries over the
fair value of identified assets, less the identified
liabilities (net of taxes in respect of temporary differences)
at the date of acquisition, is recorded as goodwill.
The goodwill is presented in the consolidated balance sheet in
the category "other assets and deferred expenses" and is
amortized in the "other expenses" item (regarding the
amortization period, see Section M., below).
(5) The consolidated financial statements include the share of
assets, liabilities, income and expenses of proportionately
consolidated subsidiaries, based on the percentage interest
held in these companies.
(6) Intercompany balances and transactions, including profits on
intercompany sales which have not yet been realized outside
the Group, are eliminated in consolidation.
E. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F. Cash equivalents
Cash equivalents include short-term bank deposits with an original
maturity not exceeding three months.
F-164
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
G. Short-term investments
Marketable securities held as a short-term investment are stated at
their market value as of the balance sheet date. Changes in the value
of the marketable securities are fully recognized on a current basis.
H. Allowance for doubtful accounts
The financial statements include an allowance for specific doubtful
accounts, which fairly reflects, in Management's estimation, the loss
expected from receivables the collection of which is doubtful.
Management determines the allowance, based, in part, on an evaluation
of credit risk using available information regarding the financial
position of the debtors, the extent of their activities and evaluation
of collateral received from them. The financial statements include
specific allowances for doubtful accounts and, as mentioned in Section
I., below, with respect to trade receivables included in the framework
of a subordinated capital note received as part of a securitization
transaction.
In addition, the financial statements also include a general allowance
for doubtful debts, which in the opinion of Management reflects the
risk included in the debts of its customers beyond the risk for which
specific allowances were made.
I. Sale of financial assets
The sale of financial assets is recognized as a sale when control over
the asset is transferred in full to an independent third party, and the
full amount of the risks and rewards embodied by the asset are
transferred to an independent third party.
J. Inventories
Inventories are valued at the lower of cost or market, cost being
determined as follows:
- Raw materials, packing materials, purchased products, spare
parts and maintenance materials on the "moving average" basis.
- Finished products and work in progress on the basis of average
production cost including materials, labor and manufacturing
overhead expenses.
K. Investments in investee companies
(1) Investments in investee companies are stated in the Company's
balance sheet according to the equity method. In determining
the net asset value of the investments in these companies, the
amounts taken into account are based on the financial
statements of these companies, after making the adjustments
thereto required by the application of generally accepted
accounting principles.
(2) Goodwill amortization - see Note 2M.
F-165
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
L. Fixed assets
(1) Fixed assets are presented at cost.
(2) The cost of assets includes financing expenses related to the
financing of their construction during the pre-operation
period. The financing expenses were capitalized as follows:
A. Where the assets under construction are financed by
specific credit - the financing expenses relating to
such credit.
B. Where the financing is not made by specific credit -
by using a rate representing the weighted average
cost rate of the credit sources, the cost of which
was not otherwise specifically capitalized.
(3) The cost of the self-constructed assets includes materials,
labor costs and interest during the pre-operation period.
(4) The cost of assets with respect to which an investment grant
was received is presented after deduction of the investment
grant received with respect thereto.
(5) Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. Annual rates of
depreciation are:
%
------------
Leasehold rights and buildings 2 - 4
Plant and equipment 4.5
Motor vehicles 15 - 20
Office furniture and equipment 6 - 15 (mainly 7%)
Computer and auxiliary equipment 20 - 33
M. Other assets and deferred charges
Other assets and deferred charges are amortized by the straight-line
method over the expected benefit period as follows:
- Product registration and acquisition of intellectual property
- mainly eight years.
- Goodwill arising on the acquisition of subsidiaries - ten or
twenty years (mainly twenty years).
- Intangible assets in purchase of products and companies -
mainly twenty years.
- Marketing rights - five years to ten years.
- Debenture issuance expenses - six years.
- Non-competition and confidentiality agreement - five years.
The amortization periods are re-examined, when economic conditions
require, with the estimated expected benefit period of the assets.
Licensing and license costs incurred in respect of products that can be
identified and isolated and that in the Group's estimation will produce
future economic benefit, are capitalized in the "other assets" category
and amortized over the period of their expected economic benefit.
F-166
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
N. Debentures convertible into shares
Debentures convertible into shares are included in the balance sheet
based on the probability of their conversion, as provided in Opinion 53
of the Institute of Certified Public Accountants in Israel. Debentures,
the conversion of which is not probable, are included as a liability at
their liability amount. Debentures, the conversion of which is
probable, are stated between the items "long-term liabilities" and
"shareholders' equity", at the higher of the liability or capital
value.
O. Company shares held by the Company and by a subsidiary
Company shares held by the Company and by a subsidiary are stated at
cost, as a deduction from the Company's shareholders' equity.
P. Revenue recognition
Revenues from sales of products are recognized upon shipment to the
customer and the transfer of the risks involved with ownership of the
products sold.
Q. Research and development costs
Research and development costs, net of grants and participations, are
charged to the statement of income as incurred. The net research and
development expenses are presented separately in the statement of
income after gross profit.
R. Deferred taxes
In July 2004, the Israeli Accounting Standards Board published
Accounting Standard No. 19 regarding "Taxes on Income" (hereinafter -
"the Standard"). The new Standard applies to financial statements for
periods beginning on January 1, 2005. Adoption of the Standard was made
by means of a cumulative effect of change in accounting method. The
transition to Accounting Standard No. 19 amounted to a one-time impact
on the income of $2 million (decrease) that derived, mainly, from an
increase in liabilities for deferred taxes relating to lands.
The Group companies create deferred taxes in respect of temporary
differences. The temporary differences are differences in the value of
assets and liabilities for tax purposes and for financial reporting
purposes. Allocation of the taxes, as stated, is executed with respect
to the differences applying to assets, the amortization of which is
deductible for tax purposes. The deferred tax balances (asset or
liability) are calculated according to the liability approach, i.e.,
the tax rates expected to be in force when the deferred tax liability
is utilized, or when the deferred tax asset is realized, as they are
known proximate to the date of approval of the financial statements.
In calculating deferred taxes, no account was taken of the taxes, which
would apply in a case of sale of the investments in the investee
companies, since it is the intention of the Company to hold these
investments and not to sell them.
The Group may be subject to additional tax in a case of distribution of
dividends between the Group companies. This additional tax was not
provided for in the financial statements in cases where Group policy is
not to distribute a dividend that involves additional tax to the Group.
F-167
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
S. Earnings per share
Earnings per share data are calculated in accordance with opinion No.
55 of the Institute of Certified Public Accountants in Israel,
retroactively adjusted for the bonus element in the issuance of rights,
and taking into consideration the likelihood of the exercise of option
warrants and convertible debentures issued by the Group.
T. Derivative financial instruments
Gain or losses on derivative financial instruments held to hedge
existing assets and liabilities are recognized concurrently with the
results of the hedged assets and liabilities.
The results of derivative financial instruments held to hedge firm
commitments are deferred, and are recognized in the same period in
which the results from the hedged transactions are recognized.
Derivative financial instruments, which are not designated for hedging
purposes, are presented in the balance sheet based on their fair value.
Changes in fair value are recorded in the statement of income in the
period in which they occur.
The fair value of derivative financial instruments is determined based
on their market value, and in the absence of such quoted market price,
fair value is determined based on a valuation model.
U. Environmental costs
The ongoing cost of maintenance and operation of facilities for the
prevention of environmental pollution and projected provisions for
environment rehabilitation costs stemming from current or past
activities, are charged to expense as incurred. The cost of
constructing facilities to prevent pollution, which increase the life
expectancy of a facility or its efficiency, or decrease or prevent
pollution, are charged to the cost of fixed assets and are depreciated
according to the usual depreciation rates used by the Group.
V. Impairment in value of assets
The Group applies Accounting Standard No. 15 - Impairment in Value of
Assets (hereinafter - "the Standard"). The Standard provides procedures
which a company must apply in order to ensure that its assets in the
consolidated balance sheet (to which the Standard applies), are not
presented at an amount which is in excess of their recoverable value,
which is the higher of the net selling price or the realization value
(the present value of the estimated future cash flows expected to be
derived from use and disposal of the asset).
The Standard applies to all the assets in the consolidated balance
sheet, except for tax assets and monetary assets. In addition, the
Standard provides rules for presentation and disclosure with respect to
assets whose value has declined. Where the value of an asset in the
balance sheet is greater than its recoverable value, the Group
recognizes a loss from impairment in value in an amount equal to the
difference between the book value of the asset and its recoverable
value. The loss recognized, as stated, will be eliminated only if there
have been changes in the estimates used in determining the asset's
recoverable value from the date on which the last loss from impairment
in value was recognized.
F-168
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
W. Linked balances and balances in foreign currency
Balances in or linked to foreign currency are included in the financial
statements at the representative exchange rates on the balance sheet
date. Balances linked to the Consumer Price Index are included on the
basis of the index relevant to each linked asset or liability.
Data regarding the representative exchange rate of the US dollar and
the Consumer Price Index are as follows:
Consumer Exchange rate Exchange rate Exchange rate
Price of the US dollar of the US dollar of the US dollar
Index against the against the against the
(Points) NIS Brazilian real Euro
---------- ---------------- ---------------- ----------------
As at
-----
December 31, 2005 110.00 4.603 2.341 0.845
December 31, 2004 107.44 4.308 2.654 0.733
Changes during the year:
------------------------
2005 2.39% 6.85% (11.8%) 15.29%
2004 1.21% (1.62%) (8.13%) (7.33%)
2003 (1.9%) (7.5%) (18.2%) (16.9%)
X. Segment reporting
Segment reporting is presented in accordance with the Accounting
Standard No. 11.
Y. Tax benefits in respect of share-based payments to employees
Tax benefits in respect of share-based payments to employees for which
the Company did not record expenses, were recorded directly under the
shareholders' equity in accordance with Clarification 7 of the Israel
Accounting Standards Board.
Z. Disclosure of the effect of new accounting standards in the
period prior to their application
1. In August 2005, the Israeli Accounting Standards Board
published Accounting Standard No. 22, "Financial Instruments:
Disclosure and Presentation". The Standard provides the rules
for presentation of financial instruments in the financial
statements and details the disclosure required in respect
thereof. In addition, the Standard provides the method for
classifying financial instruments as financial liabilities and
as shareholders' equity, for classifying the interest,
dividends, losses and gains related thereto and the
circumstances in which financial assets and financial
liabilities should be offset. The new Standard applies to
periods beginning on January 1, 2006 or thereafter. The
Standard provides that it is to be adopted on a prospective
("from here on") basis. Accordingly, the comparative data
presented in the financial statements for periods beginning on
the date the Standard comes into effect will not be restated.
The expected impact of the first-time application of the
Standard on the Group's financial statements is: separation of
convertible debentures into a liability component and a
capital component (resulting in an impact on the shareholders'
equity, long-term liabilities and financing expenses which in
the opinion of management of the Company are immaterial) and
elimination of provisions for losses in respect of options to
employees in consolidated companies in the amount of
approximately $2 million.
F-169
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
Z. Disclosure of the effect of new accounting standards in the
period prior to their application (cont'd)
2. In September 2005 the Standards Board published Accounting
Standard No. 24, "Stock-Based Compensation". The Standard
requires recognition of stock-based compensation transactions
in the financial statements, including transactions with
employees or other parties that are to be settled with capital
instruments, cash or other assets. According to the Standard,
stock-based compensation transactions wherein goods or
services are received, are to be recognized based on their
fair value.
The Standard also provides disclosure requirements concerning
the substance and scope of stock-based compensation
arrangements that existed during the period, and the manner in
which the fair value of such arrangements was determined.
The Standard will apply to financial statements for periods
beginning on January 1, 2006, and early application is
recommended. The Standard's provisions are to be applied for
each stock-based compensation transaction executed after March
15, 2005 that did not fully vest by the date of initial
implementation of the Standard.
Changes in the terms of stock-based compensation transactions
that are settled by means of capital instruments are to be
accounted for in accordance with the Standard, and the
comparative data relating to periods commencing March 15, 2005
is to be restated.
The expected impact of the initial application of the Standard
on the Group's financial statements is the recording of an
expense in respect of benefits granted to employees in the
framework of option distribution plans after March 15, 2005.
On August 8, 2005, the Group's Board of Directors decided to
amend the exercise price of part of the options - see Note
21(B)(d). Furthermore, the subsidiary has share-based payment
transactions settled in cash regarding which the provisions of
the standard should be implemented retroactively.
In the opinion of management of the Company and the
subsidiary, the expense that will be recorded in 2006 in
respect of the aforementioned as an amendment to the
comparative figures will be immaterial.
3. In February 2006, the Israeli Accounting Standards Board
published Accounting Standard No. 21, "Earnings per Share"
(hereinafter - "the Standard"). The Standard provides that an
entity is to calculate the amounts of the reporting entity's
basic earnings per share with respect to income or loss that
relate to the reporting entity's ordinary shareholders,
including to income or loss from continuing operations that
relate to the reporting entity's ordinary shareholders, if
such income or loss is reported. The basic earnings per share
are to be calculated by dividing net income or loss allocable
to the reporting entity's ordinary shareholders (the
numerator), by the weighted-average number of ordinary shares
outstanding (the denominator) during the period, for
calculating diluted earnings per share, an entity is to adjust
the income or loss allocable to the reporting entity's
ordinary shareholders and the weighted-average number of
ordinary shares outstanding, for the impact of all potentially
dilutive ordinary shares. The Standard applies to financial
statements for periods beginning on January 1, 2006 and
thereafter. The Standard's provisions are to be applied
retroactively to the comparative earnings per share relating
to prior periods.
Transition to the Standard will amount to an increase in the
basic earnings per share in the amount of $ 0.05 and the
amount of $ 0.04 for the years 2005 and 2004, respectively,
and an increase in the diluted earnings per share in the
amount of $ 0.01 and the amount of $ 0.01 for the years 2005
and 2004, respectively.
F-170
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
Z. Disclosure of the effect of new accounting standards in the
period prior to their application (cont'd)
4. In February 2006, the Israeli Accounting Standards Board
published Accounting Standard No. 25, "Revenues" (hereinafter
- "the Standard"). The Standard provides the required
accounting treatment (rules for recognition, measurement,
presentation and disclosure) with respect to revenues deriving
from sales of goods, provision of services, and use by others
of an entity's assets, which generate interest, royalties and
dividends. The Standard provides that an entity is to measure
its revenues based on the fair value of the consideration
received and/or that it is entitled to receive. The Standard
applies to financial statements for periods beginning on
January 1, 2006 or thereafter. An entity that in the past did
not present its revenues according to the requirements of the
Standard regarding the reporting of gross or net revenues, is
to apply the Standard's requirements retroactively with
respect to its revenues for all the periods reported as
comparative figures in the financial statements for periods
beginning from the Standard's commencement date. Assets and
liabilities included in the financial statements as at
December 31, 2005 at amounts different from those that would
have been presented if the Standard's provisions had been
implemented, are to be adjusted as at January 1, 2006 to the
amounts that would have been presented according to the
Standard's instructions. The effect of adjusting the amounts
of assets and liabilities as at January 1, 2006, as stated, is
to be recognized as a cumulative effect of a change in
accounting method. Except for that stated above, the
comparative figures in the financial statements for periods
beginning from the Standard's commencement date, are to be
presented as they were reported in the past.
In the estimation of Company Management, the initial
application of the Standard will have no effect on the Group's
financial statements.
F-171
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Trade Receivables
Consolidated
Composition:
December 31
--------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Open accounts -
Foreign 337,508 312,711
Domestic (Israel) 13,721 14,812
Checks receivable 5,801 5,796
Subordinated capital note and
receivables related to sale of
trade receivables in a
securitization transaction (1) 55,022 60,536
------------- -------------
412,052 393,855
Net of allowance for doubtful debts 28,806 24,646
------------- -------------
383,246 369,209
============= =============
(1) Sale of trade receivables in a securitization transaction:
---------------------------------------------------------
December 31
------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Trade receivables included in the
securitization transaction
as at the balance sheet date 201,529 202,832
Less - proceeds in respect of
such receivables, net (*) 165,196 146,264
------------- -------------
Subordinated capital note 36,333 56,568
Trade receivables sold where
the proceeds in respect thereof
were received subsequent to the
balance sheet date, net 18,689 3,968
------------- -------------
Subordinated capital note and
receivables related to sale of
trade receivables in a
securitization transaction 55,022 60,536
============= =============
(*) As at the balance sheet date cash proceeds in the amount of $146.5
million were received in respect of the sale of trade receivables
in a securitization transaction (December 31, 2004 - approximately
$142.2 million).
F-172
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Trade Receivables (cont'd)
Consolidated (cont'd)
In October 2001, the Company and certain subsidiaries signed
an agreement according to which those companies entered into a
securitization transaction, under which such companies sold
all their trade receivables to foreign companies, which were
incorporated for this purpose and which are not owned or
controlled by the Makhteshim Agan Industries Group
(hereinafter - "the Target Companies"). The purchase of the
debts by the purchasing companies was financed by Kitty Hawk
Funding Corp., a US corporation of the Bank of America Group.
On September 28, 2004, the Company and subsidiaries signed an
agreement with Bank of America to end the undertaking in the
securitization transaction. On the same date, the Company and
certain subsidiaries (hereinafter - "the Companies") entered
into a new agreement with Rabobank International for sale of
customer receivables in the framework of a securitization
transaction, this being in place of the prior agreement with
Bank of America. The new agreement is similar in principle to
the prior agreement with certain changes including, among
others, that in the new agreement additional Company
subsidiaries are included in the transaction.
Pursuant to the new securitization agreement, the Companies
will sell their trade receivables to a foreign company
(hereinafter - "the Acquiring Company") which was set up for
this purpose and which is not owned or controlled by the
Makhteshim Agan Industries Group.
Acquisition of the trade receivables by the Acquiring Company
will be financed by a U.S. company, Erasmus Capital
Corporation, of the Rabobank International Group. At the time
of transition from the prior agreement to the new agreement
the Acquiring Company purchased the trade receivables that
remained in the ownership of the Target Companies. Trade
receivables included in the securitization transaction are
those who stand in compliance with a number of criteria, as
determined in the agreement.
The maximum expected volume of the financial means available
to the Acquiring Company for the purpose of purchasing the
trade receivables of the consolidated subsidiaries, is $250
million (as opposed to $150 million in the former
securitization agreement) on a current basis, such that the
amounts to be collected from customers whose debts were sold,
will serve to purchase new trade receivables.
In 2005, additional subsidiaries in Australia and in the
United States were added to the agreement.
The period in which the Companies will sell their trade
receivables to the Acquiring Company is one year from the date
of the closing of the transaction. The period may be extended,
with the consent of both parties, for additional one-year
periods, up to a maximum of 4 extensions.
The price at which the trade receivables will be sold is the
amount of the debt being sold less an amount calculated on the
basis of the period anticipated to pass between the date the
debt was sold and the repayment date.
On the date of purchasing the debt, the acquiring company will
pay in cash the major part of the debt price. The balance of
the debt price will be embodied in a subordinated capital note
to be paid after the debt is collected. The rate of the cash
payment will vary in accordance with the composition of the
client portfolio and its performance.
F-173
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 3 - Trade Receivables (cont'd)
(1) Sale of trade receivables in a securitization transaction:
----------------------------------------------------------
(cont'd)
The Company shall bear in full losses sustained by acquiring
companies due to the non-payment of the trade receivables
included in the securitization transaction, up to the amount
of the total outstanding balance of the debt included in the
subordinated capital note.
The Acquiring Company will not have a right of recourse to the
Companies with respect to the amounts paid in cash, except in
the case of debts in respect of which a commercial dispute
arises between the Companies and their customers, namely, a
dispute arising from an alleged failure to comply with an
obligation of the seller in the supply agreement for the
product, such as: failure to supply the correct product,
defect in the product, non-compliance with the supply date,
etc.
The Companies will handle for the Acquiring Company the
collection of the sold trade receivables included as part of
the securitization transaction.
The accounting treatment of the sale of trade receivables in a
securitization transaction is the recognition of the sale of
only that part of the debt where the risk and control thereof
has been finally and absolutely transferred to the buyer.
Accordingly, trade receivables sold were deleted where the
consideration in respect thereof had been received in cash
and/or by a non-deferred liability. With respect of that part
of the trade receivables included in the securitization
transaction, which was not recognized as a sale, a
subordinated capital note receivable was recorded in the
amount of the difference between the amount of trade
receivables included in the transaction and the amounts of
consideration received, as above, and receivables were
recorded in respect of the debts sold where the consideration
in respect thereof was received subsequent to the balance
sheet date.
The loss on sale of the trade receivables is recognized at the
date of sale and is reflected in the item "other expenses".
As part of the agreement, the Company committed to maintain
certain financial ratios, mainly, debt to equity and
profitability ratios - see Note 20C.
(2) During 2005, subsidiaries signed agreements with a bank
pursuant to which the subsidiaries sold certain trade
receivables to the bank. In the balance sheet as at December
31, 2005, the balance of the trade receivables was reduced in
respect of the receivables sold, in the amount of $17.3
million.
The difference between the book value of the receivables sold
and the proceeds received from the bank was recorded in the
"other expenses" item. In accordance with the agreements, the
subsidiaries committed to indemnify the bank in certain cases
defined in the agreements, if the receivables sold are not
paid.
F-174
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
------------------------------------------------------------------------------------------------------------------------------
Note 4 - Other Receivables
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- ------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- --------------
Claims from the government in
respect of participations and
tax refunds 33,809 28,277 - -
Advance tax payments, net of
provisions 8,331 11,071 - -
Employees (1) 1,300 1,376 - 6
Deferred taxes (Note 17) 15,922 17,037 341 325
Current maturities of long-term
receivables 216 420 - -
Prepaid expenses and accrued
income 12,219 10,372 72 168
Dividend receivable - - 14,200 11,200
Other 14,617 8,666 - -
------------- ------------- ------------- --------------
86,414 77,219 14,613 11,699
============= ============= ============= ==============
(1) Includes a non-linked bank deposit
designated for the purpose of
granting loans to employees and
bearing annual interest at the
rate of 4% - 2.15% 295 417 - -
============= ============= ============= ==============
Note 5 - Loans to Investee Companies
Company
December 31,
---------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Short-term loans (1) 25,778 16,056
Current accounts (2) 14,102 14,903
------------- -------------
39,880 30,959
============= =============
(1) The loan is a dollar loan and bears interest of 2.3% - 4.6%.
(2) The accounts are mainly linked to the US dollar and are non-interest bearing.
F-175
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 6 - Inventories
Consolidated
December 31
--------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Finished products 345,187 263,579
Work in progress 47,159 29,117
Raw materials 125,064 115,046
Packing materials 4,587 4,863
Spare parts and maintenance materials 12,694 12,820
------------- -------------
534,691 425,425
Purchased products 31,725 35,445
------------- -------------
566,416 460,870
============= =============
Note 7 - Investments in Investee Companies
Company
A. Composition
December 31
--------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Subsidiaries -
Cost of shares 427,178 424,865
Company's equity in retained
earnings and capital reserves
accumulated from date of
acquisition, net 508,202 351,475
Adjustments deriving from
translation of
financial statements
of investee companies (4,126) (1,425)
------------- -------------
931,254 774,915
Less - investment in Company
shares held by subsidiary (9,708) (11,232)
Capital reserve from acquisition
and sale of debentures
convertible into shares
of the Company
by a subsidiary 399 399
------------- -------------
921,945 764,082
Loans - C(1) 115,684 242,417
Capital notes - C(2) 131,402 -
Perpetual loan - C(3) 2,500 2,500
------------- -------------
1,171,531 1,008,999
============= =============
F-176
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (Cont'd)
Company
B. Movement during the year
2005
-------------
US$ thousands
-------------
Balance at beginning of year 1,008,999
Company's equity in net earnings
of investee companies, net 217,362
Adjustments deriving from translation
of financial statements of investee companies (2,701)
Dividend (63,787)
Dividend in respect of treasury stock 696
Investment in shares 2,313
Realization of Company shares held by a subsidiary 3,848
Share in other reserve funds 132
Change in loans and capital notes, net 4,669
-------------
Balance at end of year 1,171,531
=============
A list of the investee companies is presented in the Appendix.
C. Terms of loans and capital notes
(1) The loans bear interest at the LIBOR rate plus a margin that
ranges from 0.8% to 2%.
(2) NIS capital notes, not linked to the CPI and not bearing
interest and the repayment date of which will not be before
January 1, 2007.
(3) The perpetual loan is non-linked and does not bear interest.
D. Additional information
(1) Acquisition of companies during 2004:
a. In April 2004, the Company, through wholly owned and
controlled subsidiaries, signed agreements for
acquisition of the ownership and control of a group
of three companies: Vegetation Management LLC, Farm
Saver. Com LLC, and Nation Ag II LLC - which are
engaged in licensing the import and marketing of
herbicides from the United States (hereinafter - "the
Companies Acquired").
The aggregate consideration for the acquisition
amounted to approximately $67 million (the
consideration is after an amendment to the original
agreement made in December 2004). Approximately $7.5
million of the aggregate consideration was paid
through a transfer of 1,908 of the Company's shares
that were held by a subsidiary (the cost of the
shares is $4.2 million).
The excess cost created on the acquisition date
amounted to $51.4 million, of which $28.4 million was
attributed to intangible assets (mainly licensing and
licenses), $0.5 million was attributed to deferred
tax liabilities, $0.6 million was attributed to
inventory and the balance, in the amount of $22.9
million, was recorded as goodwill.
The excess cost attributed to the licensing and the
licenses, as well as the goodwill, are being
amortized over a period of 20 years that, in the
Company's estimation, represents the period of
economic benefit to be derived therefrom.
F-177
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
Company
D. Additional information (cont'd)
(1) Acquisition of companies during 2004: (cont'd)
a. (cont'd)
The statements of income and cash flows of the
Companies Acquired have been included in the
financial statements of the Groupas of May 1, 2004.
The effect of the first time consolidation of the
activities acquired on the consolidated statements of
income was an increase in revenues of $24.1 million
for the period ended December 31, 2004, and an
increase to net income (after amortization of
goodwill) of $5.6 million for the same period. The
impact on the consolidated balance sheet as at
December 31, 2004 is an increase of assets in the
amount of $77.5 million.
b. During 2004, the Company signed, through
subsidiaries, agreements for the acquisition of three
marketing companies, as follows:
1) In June 2004, the Company, through a wholly
owned and controlled subsidiary, signed an
agreement to acquire 45% of the rights in
the U.S. company, Control Solutions Inc.
(hereinafter - "CSI"), which is engaged in
the marketing of pesticides to the
non-agricultural market in the United
States.
Based on the acquisition agreement, so long
as the subsidiary holds 45% of the shares of
CSI, decisions in areas critical to CSI are
to be made jointly by all the shareholders
of CSI. Therefore, CSI has been consolidated
in the financial statements by means of the
proportionate consolidation method.
In addition, the subsidiary was given an
option, which may be exercised at any time
during the next three years, to increase its
share in CSI to 60%, in exchange for a
payment ranging between $1.5 million and
$10.5 million, in accordance with the
earnings of CSI in 2004-2006.
Furthermore, commencing from 2009, both the
subsidiary and the remaining shareholders of
CSI have the right to require the subsidiary
to acquire from the remaining shareholders
of CSI the balance of their shares in CSI in
consideration of an amount to be determined
based on the income of CSI in the three
years preceding the acquisition date.
Regarding exercise of the option for
increasing the Company's share in CSI to 60%
- see Note 7(D)2(c).
2) In July 2004, the Company, through a wholly
owned and controlled subsidiary, signed an
agreement for acquisition of all the shares
and rights of Farmoz PTY Limited, an
Australian company engaged in the marketing
and distribution of pesticides in Australia.
F-178
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
D. Additional information (cont'd)
(1) Acquisition of companies during 2004:
b. (cont'd)
3) In August 2004, the Company, through a
subsidiary, signed an agreement for
acquisition of 50.1% of the rights in the
U.S. company, RiceCo LLC, which is engaged
in the development and marketing of
herbicides in the rice sector.
The aggregate cost of the acquisition of the
marketing companies amounted to $41 million. The
excess cost resulting from the acquisitions amounted
to $31.1 million, of which $15 million was attributed
to intangible assets (mainly licensing and licenses),
$3.5 million was attributed to deferred tax
liability, $0.7 million was attributed to inventory
and the balance, in the amount of $18.9 million, was
recorded as goodwill.
The excess cost attributed to the licensing and the
licenses, as well as the goodwill, are being
amortized over a period of 20 years which, in the
Company's estimation, represents the period of
economic benefit to be derived therefrom.
The financial statements of the three marketing
companies acquired have been consolidated from the
respective dates of their acquisitions. The total
effect of the first time consolidation of the
aforementioned marketing companies on the
consolidated statements of income from the date of
their initial consolidation is an increase in
revenues of $46.2 million for the period ended
December 31, 2004 and a reduction of net earnings
(after goodwill amortization) of $0.3 million for
that period. The effect on the consolidation on the
balance sheet as at December 31, 2004, is an increase
of assets in the amount of $72.8 million.
(2) Acquisition of companies during 2005:
(a) In January 2005, the Company, through a wholly owned
and fully controlled subsidiary, signed an agreement
for the acquisition of 49% of the shares of
Makhteshim Agan Benelux & Nordic B.V. (hereinafter -
Mabeno), which acts as the exclusive distributor of
plant protection products in the Benelux area and
Scandinavia. Pursuant to the agreement, the
consideration was paid in 693 thousand of the
Company's shares that were held by the subsidiary.
In accordance with the acquisition agreement, two of
the three acting directors of Mabeno will be
appointed by the subsidiary. Therefore Mabeno was
fully consolidated in the financial statements.
Furthermore, the subsidiary was granted an option,
exercisable at any time, to increase its share in
Mabeno to 55%.
As from 2008 the other shareholders of Mabeno have
the right to demand that the subsidiary purchase
their shares in Mabeno. As from 2013 the subsidiary
has the right to demand that the other shareholders
will sell it their shares in Mabeno.
F-179
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
D. Additional information (cont'd)
(2) Acquisition of companies during 2005 (cont'd)
(b) In April 2005, the Group, through wholly owned and
fully controlled subsidiaries, signed an agreement
for the purchase of 70% of the shares of Biomark
Tradinghouse Co., which engages in the marketing of
plant protection materials in Hungary.
(c) In October 2005 a wholly owned subsidiary exercised
its option to increase its share in CSI, and thus
increased its holdings to 60%. Accordingly the
company was fully consolidated as from October 2005.
The cost of acquiring the two aforementioned companies,
including the cost of exercising the option to increase the
rate of holding in CSI ("the acquired companies") amounted to
$ 12.6 million. Excess cost in the amount of $ 14.7 million
was created upon acquisition, of which $ 9 million was
attributed to intangible assets, $ 0.5 million was attributed
to inventory, and the balance of $ 5.2 million was attributed
to goodwill.
The excess cost attributed to the goodwill are amortized over
a period of 20 years, which is evaluated by management to be
the period over which economic benefits will arise therefrom.
The acquired companies' have been included in the Group's
consolidated financial statements from the respective dates of
their acquisition. The effect of the initial consolidation of
the acquired companies on the consolidated statements of
income, from the date of their initial consolidation, amounted
to an increase in revenues in the amount of $ 52 million for
the period ended December 31, 2005 and to a decrease in net
earnings (after amortization of goodwill) in the amount of $
1.2 million for the same period. The effect on the
consolidated balance sheet as at December 31, 2005 is an
addition to assets in the amount of $ 49.3 million.
(3) With respect to Goodwill on acquisition of investee companies
and the unamortized balance thereof - see Note 10.
(4) With respect to guarantees for investee companies - see Note
19E.
E. Convertible securities in investee companies
(1) A subsidiary, Lycored - Natural Products Industries Ltd.
(hereinafter - "Lycored"), has granted stock options to
employees, which, if exercised, will dilute the Company's
holding in Lycored to about 91.84%.
As at the balance sheet date, exercise of the said options is
reasonable and if all of the options are exercised for shares
of Lycored, the Company will sustain a loss from decline in
its holdings' percentage, in the amount of $ 2,145 thousand.
The financial statements include a provision for this amount.
(2) On August 23, 2005 the Board of Directors of Lycored decided
to approve an additional issuance of options to directors and
managers of Lycord - including the Chairman of the Board of
Directors, the CEO and two additional officers of the company.
The total number of options issued is 2,581,752 options
exercisable for 2,581,752 ordinary shares of NIS 1 par value
each of Lycored - constituting 18% of Lycored's issued and
paid-up share capital. The Chairman of the Board of Directors
and the CEO were each issued 176,048 options.
F-180
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
E. Convertible securities in investee companies (cont'd)
(3) On October 28, 2003, the Board of Directors of Luxembourg
Medicine Ltd. (hereinafter - "Luxembourg") approved the
issuance of options to employees of Luxembourg and its
subsidiary. Exercise of the options will dilute the holding of
the Company in Luxembourg to about 92%.
Note 8 - Long-Term Investments, Loans and Receivables
A. Composition
Consolidated Company
------------------------------- ------------------------------
December 31 December 31 December 31 December 31
------------- ------------- ------------- -------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Long-term investments, loans and
receivables [B(1)] 22,460 23,265 - -
Bank deposits [B(2)] - - 19,176 19,016
------------- ------------- ------------- -------------
22,460 23,265 19,176 19,016
Net of allowance for doubtful debts - 1,500 - -
------------- ------------- ------------- -------------
22,460 21,765 19,176 19,016
Less - current maturities 216 420 - -
------------- ------------- ------------- -------------
22,244 21,345 19,176 19,016
Other investments [B(3)] 440 725 - -
------------- ------------- ------------- -------------
22,684 22,070 19,176 19,016
============= ============= ============= =============
B. Additional information
(1) Long-term investments, loans and receivables
--------------------------------------------
A. Linkage terms and interest rates
Consolidated
---------------------------------
December 31 December 31
-------------- --------------
2005 2004
-------------- --------------
US$ thousands US$ thousands
-------------- --------------
In Israeli currency - not linked 2,427 2,353
In dollars 2,684 1,710
In Brazilian reals 13,885 15,715
Other foreign currency 3,464 3,487
-------------- --------------
22,460 23,265
============== ==============
The above investments, loans and receivables are non-interest bearing.
F-181
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 8 - Long-Term Investments, Loans and Receivables (cont'd)
B. Additional information (cont'd)
(1) Long-term investments, loans and receivables (cont'd)
--------------------------------------------
B. Maturities
The investments, loans and receivables mature as follows:
US$ thousands
-------------
First year (current maturities) 216
Second year 1,401
Third year 1,913
Fourth year 1,464
Fifth year 72
With no defined repayment date 17,394
-------------
22,460
=============
(2) Bank deposits
-------------
Company
Interest rate ------------------------------
as at balance December 31 December 31
sheet date 2005 2004
------------- -------------- -------------
% US$ thousands US$ thousands
------------- -------------- -------------
Dollar deposits 4 10,871 10,711
Dollar deposits 5.1 8,305 8,305
-------------- -------------
19,176 19,016
============== =============
During the years 2002 and 2001, the Company made deposits in a
Brazilian bank in the amount of $8,300 thousand and $45,600
thousand, respectively, for a five-year period. Such deposits
serve as sole security for loans taken out by a subsidiary
from the same bank and in the same amounts. The loans are in
dollars, bear interest at the rate of 5.3% and 3.5% p.a. and
are scheduled to be repaid in 2006. The Company and the
subsidiary are able to realize the deposit and make early
repayment of the loan on certain dates as provided in the
agreement.
In September 2003, the amount of $ 25 million was paid out of
these deposits and in February 2004 the amount of an
additional $10 million was paid out of these deposits.
Concurrently, loans were repaid in the same amount.
In the consolidated balance sheet, the amounts of the deposits
were set-off against the amounts of the loans taken out by the
subsidiary (see Note 14A).
(3) In 1998, the Company entered into an agreement with the
shareholders of Hazera Genetics Ltd. and established a joint
venture intended to function as a venture capital fund for the
investment in companies which are engaged in the field of
agricultural biotechnology. Other investments include the
Group's share (50%) in biotechnology companies.
F-182
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 9 - Fixed Assets
A. Composition
Consolidated
Land and Plant and Motor Office furniture Total
buildings equipment vehicles and equipment -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ---------------- -------------
Cost
Balance as at
December 31, 2004 130,725 661,322 4,999 27,498 824,544
Additions, net of
grants 9,418 47,030 1,226 3,687 61,361
Newly consolidated
companies 1,144 843 366 - 2,353
Disposals (848) (874) (1,446) (610) (3,778)
------------- ------------- ------------- ---------------- -------------
Balance as at
December 31, 2005 140,439 708,321 5,145 30,575 884,480
------------- ------------- ------------- ---------------- -------------
Accumulated
depreciation
Balance as at the
beginning of the year 48,037 319,953 2,600 18,215 388,805
Additions 5,046 24,927 762 3,588 34,323
Newly consolidated
companies 147 137 29 - 313
Eliminated on
disposals (213) (597) (1,033) (484) (2,327)
------------- ------------- ------------- ---------------- -------------
Balance as at
December 31, 2005 53,017 344,420 2,358 21,319 421,114
------------- ------------- ------------- ---------------- -------------
Net book value
As at
December 31, 2005 87,422 363,901 2,787 9,256 463,366
------------- ------------- ------------- ---------------- -------------
As at
December 31, 2004 82,688 341,369 2,399 9,283 435,739
============= ============= ============= ================ =============
December 31
---------------------------------
2005 2004
-------------- -------------
US$ thousands US$ thousands
-------------- -------------
Cost of assets includes:
Buildings and development on freehold land 88,604 83,289
Buildings and development on land held under capitalized leases 51,835 47,436
Capitalized financing expenses 19,205 19,019
Fully-depreciated equipment 109,741 107,741
Cost of assets is net of grants received 102,329 99,015
F-183
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 9 - Fixed Assets (cont'd)
B. Additional information
(1) Makhteshim's plants are located on land in Ramat Hovav and in
Beer-Sheva which is leased from the Israel Lands
Administration. The leasehold periods terminate between 2018
and 2029 with renewal options. The leasehold rights have not
yet been registered in the name of Makhteshim in the Israel
Land Registry. (The legal advisors of Makhteshim are attending
to the registration).
Agan's plant is located on freehold land of approximately 121
dunams in Ashdod, of which 90 dunams are registered in the
name of Agan in the Land Registry with the remaining area of
approximately 30 dunams, which was acquired in 1996, currently
undergoing the registration process.
Plants of foreign investee companies are constructed on
freehold land.
(2) Regarding liens - see Note 20.
Note 10 - Other Assets long term and Deferred expenses
A. Composition:
Consolidated
December 31, 2005
--------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- -------------- -------------
US$ thousands US$ thousands US$ thousands
------------- -------------- -------------
Product registration and acquisition of intellectual
property 340,622 147,226 193,396
Goodwill on acquisition of subsidiaries 165,825 55,576 110,249
Intangible assets on purchase of products 281,223 56,303 224,920
Marketing rights 21,273 16,554 4,719
Debenture issuance expenses 997 651 346
Non-competition and confidentiality agreement 2,576 1,152 1,424
------------- -------------- -------------
812,516 277,462 535,054
============= ============== =============
December 31, 2005
--------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- -------------- -------------
US$ thousands US$ thousands US$ thousands
------------- -------------- -------------
Product registration and acquisition of know-how 280,988 105,996 174,992
Goodwill on acquisition of subsidiaries 153,963 51,489 102,474
Intangible assets on purchase of products 281,223 41,186 240,037
Marketing rights 20,830 14,915 5,915
Debenture issuance expenses 3,730 1,272 2,458
Non-competition and confidentiality agreement 2,576 1,032 1,544
------------- -------------- -------------
743,310 215,890 527,420
============= ============== =============
F-184
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 10 - Other Assets long term and Deferred expenses (cont'd)
Company
December 31, 2005
------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- -------------- -------------
US$ thousands US$ thousands US$ thousands
------------- -------------- -------------
Debenture issuance
expenses 997 651 346
============= ============== =============
December 31, 2005
------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- -------------- -------------
US$ thousands US$ thousands US$ thousands
------------- -------------- -------------
Debenture issuance
expenses 3,730 1,272 2,458
============= ============== =============
B. Additional details
1. In October-November 2002, subsidiaries, which are
wholly-controlled by the Company, signed a number of
agreements with Bayer Crop Science AG for the acquisition of a
number of products, licenses and distribution rights in the
area of vegetation protection. The total consideration for
such acquisition amounted to $185.3 million, which is
presented in the "other assets and deferred expenses"
category.
Approximately $34.6 million of the consideration was allocated
to acquisition of permits and licenses in connection with the
products and is amortized over a 20-year period in the
"selling and marketing expenses" category, and approximately
$144.1 million was allocated to acquisition of the products in
the framework of a "going concern", which constitutes goodwill
on the acquisitions of products, and which is amortized over a
20-year period in the "other expenses" category.
The consideration in respect of acquisition of the marketing
and distribution rights, in the amount of $6.6 million, is
being amortized over a period of 6-8 years.
2. In 2001, fully controlled subsidiaries of the Company signed
agreements with Aventis and Syngenta A.G. for the purchase of
four new agrochemical products as well as the purchase of
marketing and distribution rights of a product package in the
Scandinavian countries. One of the products which was
purchased is still protected by patents which were transferred
to the purchasing company.
The total price paid for purchase of the four products totaled
$105 million, and it is included in "other assets and deferred
charges".. Of the amount paid, $20 million was attributed to
registration costs and licensing, which are being amortized
over a period of 20 years in the "selling and marketing
expenses", $2.5 million was attributed to the purchase of
agreements with third parties, which is being amortized over a
period of 10 years, and the balance of the amount was
attributed to the purchase of the product as a going concern
which includes: intellectual rights, trade name, brand name,
technological know-how, information on customers and suppliers
of materials, etc., which constitutes goodwill on the purchase
of the products and is being amortized over a period of 20
years under other expenses. The price of the marketing and
distribution rights was $5 million and is amortized over a
period of 9 years.
F-185
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 10 - Other Assets and Deferred Charges (cont'd)
B. Additional details (cont'd)
3. Regarding goodwill and other assets created in the framework
of acquisition of companies during the period of the report,
see Note 7D.
4. In connection with a non-competition and confidentiality
agreement with the former CEO of Milenia, see Note 30A(4).
Note 11 - Short-term Credit from Banks
A. Composition
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
Credit from banks
Overdrafts 119,967 55,613 - -
Short-term loans 109,462 57,366 59,000 -
------------- ------------- -------------- --------------
229,429 112,979 59,000 -
Current maturities of long-term loans 18,609 27,042 - -
------------- ------------- -------------- --------------
248,038 140,021 59,000 -
============= ============= ============== ==============
B. Linkage terms and interest rates
Consolidated Company
Weighted -------------------------------- ---------------------------------
interest rate December 31 December 31
at balance -------------------------------- ---------------------------------
sheet date 2005 2004 2005 2004
-------------- ------------- ------------- -------------- --------------
% US$ thousands US$ thousands US$ thousands US$ thousands
-------------- ------------- ------------- -------------- --------------
Credit from banks
Overdrafts:
In Israeli currency 7.5 424 2,892 - -
In US dollars 5.25-7.04 92,302 39,272 - -
In Euro 6.0 13,618 11,350 - -
In Brazilian currency 17.7 11,639 1,814 - -
In other currencies 6-7.2 1,984 285 - -
------------- ------------- -------------- --------------
119,967 55,613 - -
------------- ------------- -------------- --------------
Short-term loans:
In dollars (1) Libor+0.5 105,953 51,677 59,000 -
In other currencies 6 3,509 5,689 - -
------------- ------------- -------------- --------------
109,462 57,366 59,000 -
------------- ------------- -------------- --------------
229,429 112,979 59,000 -
============= ============= ============== ==============
C. Regarding collateral - see Note 20A.
F-186
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 12 - Trade Payables
Consolidated
Consolidated
--------------------------------
December 31
--------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Open accounts 338,462 325,770
Checks payable 136 175
------------- -------------
338,598 325,945
============= =============
Note 13 - Other Payables
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
Salaries and payroll accruals 36,290 32,591 4,343 2,627
Accrued income taxes, net of
advance payments 30,199 38,047 3,178 -
Government agencies 6,478 5,804 74 142
Subsidiaries - current account - - 127 33
Liability for securities sold short (1) - 5,627 - -
Derivatives 9,074 9,608 - -
Accrued expenses and deferred
income 60,397 63,672 1,087 3,209
Payables in respect of acquisition
of subsidiary 957 6,500 - -
Others 53,778 30,556 1,078 749
------------- ------------- -------------- --------------
197,173 192,405 9,887 6,760
============= ============= ============== ==============
(1) In 2004, a subsidiary borrowed marketable debentures from a
bank for purposes of the short sale thereof. The borrowing
period is three months, which is renewed every three months
subject to the lender's agreement.
The subsidiary's liability in respect of the bonds borrowed,
was presented based on the market value of the bonds.
F-187
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 14 - Long-Term Loans from Banks
A. Composition
Consolidated
--------------------------------
December 31
--------------------------------
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Loans from banks* 54,193 120,065
Less - current maturities 18,609 27,042
------------- -------------
35,584 93,023
============= =============
* After the deduction of an
investment in bank deposits (see
Note 8B2) in the amount of: 19,176 19,016
============= =============
B. Linkage terms and interest rates
Consolidated
Weighted --------------------------------
interest rate December 31
at balance --------------------------------
sheet date 2005 2004
------------- ------------- -------------
% US$ thousands US$ thousands
------------- ------------- -------------
In US dollars 4.71-6.55 47,528 103,124
In Euro 3.55 4,999 9,189
In Israeli currency 6.1-8.7 1,666 1,548
In other foreign
currency - 6,204
------------- -------------
54,193 120,065
============= =============
C. Maturities
Consolidated
--------------
US$ thousands
--------------
First year - current maturities 18,609
Second year 13,534
Third year 12,861
Fourth year 4,189
Fifth year 2,000
Sixth year and thereafter 3,000
--------------
54,193
==============
F-188
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 14 - Long-Term Loans from Banks (cont'd)
D. Regarding the commitment of the Company and certain
subsidiaries to banks, to maintain certain financial criteria,
mainly, debt-equity and profitability ratios - see Note 20C.
E. Collaterals - see Note 20A.
Note 15 - Convertible Debentures
A. Presented in the "long-term liabilities" category
-------------------------------------------------
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
Debenture principal - 150,000 - 150,000
-============ ============= ============== ==============
B. Presented in a separate category between "long-term liabilities" and "shareholders' equity"
-------------------------------------------------------------------------------------------
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
Debenture principal 41,152 39,474 41,152 39,474
Discount balance, net (673) (1,152) (1,086) (1,565)
------------- ------------- -------------- --------------
40,479 38,322 40,066 37,909
============= ============= ============== ==============
1. (1) In November 2001, convertible debentures
and options were issued pursuant to a
prospectus, as follows:
NIS 270,000,000 par value registered
debentures (Series A) offered at 90% of the
par value, repayable in a lump-sum payment
on November 20, 2007, bearing interest at
the annual rate of 2.5% and linked (interest
and principal) to the representative
exchange rate of the dollar. On any trading
day, commencing with the registration date
of the debentures (Series A) for trading on
the stock exchange and up to and including
October 31, 2007, the debentures (Series A)
are convertible into fully paid-up ordinary
registered shares of NIS 1 par value each,
based on a conversion rate of NIS 10.68 par
value debentures (Series A) for one ordinary
share of NIS 1 par value.
As a result of dividend distributions, the
conversion rate was updated and, as at the
balance sheet date, it stands at NIS 9.61
par value.
(2) 18,000,000 registered options (Series 1),
exercisable for 18,000,000 ordinary shares
of NIS 1 par value each of the Company, on
any trading day, commencing with the
registration date thereof for trading on the
stock exchange and up to and including
November 20, 2005, such that every option
(Series 1) may be exercised for one ordinary
share of NIS 1 par value (subject to
adjustments), against a cash payment of the
exercise price of NIS 10.68, linked to the
representative exchange rate of the dollar.
In any case, the exercise price will not be
less than NIS 10.68. An option (Series 1)
which is not exercised up to and including
November 20, 2005, will be invalid and will
not convey to its holder any right vis-a-vis
the Company. On November 20, 2005, the
options expired.
F-189
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 15 - Convertible Debentures (cont'd)
B. Presented in a separate category between "long-term
---------------------------------------------------
liabilities" and "shareholders' equity" (cont'd)
---------------------------------------
The securities were offered to the public in
1,200,000 units by means of a tender on the
unit price, where the composition of each
unit is NIS 225 par value of debentures
(Series A) at the price of 90% of their par
value (NIS 202.5) and 15 options (Series 1)
for no consideration. The total minimum
price per unit was NIS 202.5.
The price per unit determined as part of the
tender was NIS 220. Taking into account the
economic value of the options (Series 1) the
discount rate with respect to the debentures
(Series A) is 9.3%. The gross consideration
received in the issuance is $62.5 million,
of which $58.5 million was attributed to the
debentures (Series A) and $4.0 million was
attributed to the options (Series 1).
2. In January 2002, the Company issued to investors, as
part of a private placement, NIS 133,980 thousand par
value convertible debentures (Series A), at a price
of NIS 1.015 for NIS 1 par value of debentures
(Series A), for an aggregate consideration of $29.5
million.
The terms of the convertible debentures (Series A)
are identical to the terms of the debentures (Series
A), issued by the Company, as stated in Section A.,
above.
3. In 2003, NIS 57,660,575 par value of debentures
(Series A) were converted into 5,565,649 ordinary
shares of NIS 1 par value, the majority at a
conversion rate of NIS 10.36 par value debentures for
one ordinary share of NIS 1 par value. The total
share capital issued as a result of the conversion is
$1,270 thousand, with a premium of $11,331 thousand.
In 2004, NIS 179,607,707 par value of debentures
(Series A) were converted into 17,582,221 ordinary
shares of NIS 1 par value, at a conversion rate of
NIS 10.03-10.36 par value debentures for one ordinary
share of NIS 1 par value. The total share capital
issued as a result of the conversion is $3,974
thousand, with a premium of $35,581 thousand.
In 2005, NIS 55,412 thousand par value of debentures
(Series A) were converted into 5,687 thousand
ordinary shares of NIS 1 par value at a conversion
rate of NIS 9.61 par value debentures for ordinary
shares of NIS 1 par value. The total share capital
issued as a result of the conversion is $1,253
thousand, with a premium of $9,756 thousand.
Subsequent to December 31, 2005, NIS 1,415 thousand
par value of debentures (Series A) were converted
into 147 thousand ordinary shares of NIS 1 par value.
F-190
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 15 - Convertible Debentures (cont'd)
B. Presented in a separate category between "long-term
---------------------------------------------------
liabilities" and "shareholders' equity" (cont'd)
---------------------------------------
As of December 31, 2005, conversion of the said
debentures is expected and, accordingly, they are
presented in the balance sheet in a separate category
between the "long-term liabilities" and the
"shareholders' equity" sections based on their
liability value.
4. In March 2004, the Company issued, as part of a
private issuance to institutional investors (mainly
overseas), non-marketable convertible debentures, in
the amount of $150 million par value (including $5
million which was issued to the underwriters in April
2005), in exchange for their par value. The period of
the debentures is 7 years and they bear annual
interest at the rate of 1.75%, which is to be paid
once a year, in March. The debentures may be
converted into ordinary registered shares of NIS 1
par value each, at a conversion rate of NIS 20.5 par
value, based on a fixed rate of exchange of US$1 =
NIS 4.514. The ordinary shares to be issued as a
result of conversion of the debentures shall be
registered for trading on the Tel-Aviv Stock
Exchange.
The owners of the debentures shall have the right to
demand payment of the debentures (principal and
interest up to that date) on March 22, 2007, by means
of advance written notice (which is given 30-60 days
prior to March 22, 2007).
The Company shall have the right to execute a forced
conversion of the debentures commencing on March 22,
2007, this being so long as the average price per
Company share in the period of 20 business days which
preceded its notification of forced conversion, shall
be at least 30% higher than the price of the
conversion rate of the debentures.
The Company committed to the debenture purchasers
that it would refrain from creating additional liens
on its property, the purpose of which is the
guarantee of marketable securities or other
securities that the Company intends to register for
trading.
The total issuance expenses with respect to the
aforementioned debentures amounted to $2.5 million.
In 2005, $135,650 thousand par value institutional
debentures were converted into 29,869 thousand shares
of NIS 1 par value, all of which based on a
conversion rate of $4.541 par value debentures for
one share of NIS 1 par value.
The total share capital issued as a result of the
conversion is $6,554 thousand at a premium of
$129,096 thousand.
As of December 31, 2005, conversion of the said
debentures is expected and, accordingly, the
debentures are presented in the balance sheet in a
separate category between the long-term liabilities
and the shareholders' equity based on the liability
value of the debentures.
F-191
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 16 - Other Long-Term Liabilities
Consolidated
Linkage terms and interest rates
Weighted
interest rate December 31
at balance ------------------------------
sheet date 2005 2004
------------- ------------- -------------
% US$ thousands US$ thousands
------------- ------------- -------------
Liabilities linked to
the US dollar 3,222 9,195
Liabilities linked to
another currency 0 1,092 142
------------- -------------
4,314 9,337
============= =============
The liabilities are schedule for repayment in the years 2007 - 2008.
Note 17 - Taxes on Income
A. Benefits under the Law for the Encouragement of Capital Investments,
1959
The plants of the subsidiaries in Israel have been granted "Approved
Enterprise" status under the Law for the Encouragement of Capital
Investments, 1959. Part of the income deriving from the approved
enterprises during the benefit period is subject to tax at the rate of
25% (the total benefit period is for seven years and in certain
circumstances ten years, but does not exceed beyond either 14 years
from the date of the letter of approval or 12 years from the date the
approved enterprise commenced operations).
Other plants of subsidiaries in Israel are entitled to a tax exemption
for periods of between two and six years and a reduced tax rate of 25%
for the remainder of the benefit period. Should a dividend be
distributed from the tax-exempt income, the subsidiaries will be liable
to pay tax on the income from which the dividend was distributed at a
rate of 25%.
The benefit period has ended for some of the plants of the subsidiaries
and the benefit period for others will end during years up to 2014. In
addition, subsidiaries have other investment programs in progress, or
for which the benefit period with respect thereto has not yet
commenced.
The abovementioned benefits are conditional upon compliance with
certain conditions specified in the Law and related Regulations, and in
the letters of approval, in accordance with which the investments in
the approved enterprises were made. Failure to meet these conditions
may lead to cancellation of the benefits, in whole or in part, and to
repayment of any benefits already received, together with interest.
Management believes that the companies are complying with these
conditions.
B. Benefits under the Law for the Encouragement of Industry (Taxes),
1969
Under the Law for the Encouragement of Industry (Taxes) 1969, the
Company is an industrial holding company and the subsidiaries in Israel
are "industrial companies". The main benefit under this law is the
filing of consolidated income tax returns. The Company files a
consolidated income tax return with Makhteshim.
F-192
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
C. Taxation under inflationary conditions
The Company and its subsidiaries in Israel are subject to the Income
Tax Law (Inflationary Adjustments), 1985. Under this Law, the results
for tax purposes are adjusted principally for the changes in the
Consumer Price Index. The financial statements are presented in US
dollars.
D. Benefits for development areas
A subsidiary is subject to the Income Tax Regulations (Tax Reductions
in Certain Settlements and Agriculture-based Army Units ("Nahal")),
1978. Under these Regulations, the subsidiary is entitled to an
additional deduction, at the rate of 25% of the tax depreciation
claimed in respect of the plants constructed in Ramat Hovav.
These Regulations were in effect until December 31, 2003.
E. Foreign subsidiaries
The subsidiaries are assessed according to the tax laws applicable in
the respective countries where these subsidiaries operate.
F. Change in tax rate
On June 29, 2004, Income Tax Ordinance Amendment (No. 140 and
Temporary Order), 2004 (hereinafter - "the Amendment") passed
the second and third reading in the Israeli Knesset. The
Amendment provides that the Companies Tax rate shall be
gradually reduced, commencing from January 1, 2004 from 36% to
30% in the following manner: in 2004 - 35%, in 2005 - 34%, in
2006 - 32% and in 2007 and thereafter - 30%.
The current taxes and the balances of the deferred taxes as at
December 31, 2004, were calculated in accordance with the tax
rates in the preceding paragraph. The impact of the reduction
in the tax rates on the Company's consolidated results of
operations for the year ended December 31, 2004 is tax income
in the amount of $4.5 million.
On July 25, 2005, the Law for Amendment of the Income Tax
Ordinance (No. 147 and Temporary Order), 2005 was passed,
pursuant to which the Companies Tax rate will be gradually
reduced in the following manner: in the 2006 tax year a tax
rate of 31% will apply, in 2007 - 29%, in 2008 - 27%, in 2009
- 26%, and in 2010 and thereafter, a tax rate of 25% will
apply. In addition, commencing from 2010, upon reduction of
the Companies Tax rate to 25%, every real capital gain will be
subject to tax at the rate of 25%.
The current and deferred taxes as at December 31, 2005, were
calculated in accordance with the new tax rates as determined
in Amendment No. 147. The impact of the reduction in the tax
rates on the consolidated financial statements for the year
ended December 31, 2005 is a decrease in the taxes on income
in the amount of $4.8 million.
F-193
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
G. Deferred taxes
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
(1) Movement
Balance at beginning
of year 37,317 33,522 (6,999) (6,250)
Included in statement
of income 7,830 (163) 968 (749)
Charged to capital (1,544) - (1,544) -
Newly consolidated 276 3,958 - -
------------- ------------- -------------- --------------
Balance at end of year 43,879 37,317 (7,575) (6,999)
------------- ------------- -------------- --------------
Classified as:
Other receivables (15,922) (17,037) (341) (325)
Long-term liabilities (in the
balances of the long-term
debt) 59,801 54,354 (7,234) (6,674)
------------- ------------- -------------- --------------
43,879 37,317 (7,575) (6,999)
============= ============= ============== ==============
(2) Composition
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
Deferred taxes in respect of:
Depreciable assets 78,831 85,564 - -
Carryforward tax losses (16,673) (19,864) (6,117) (5,343)
Inventories (11,760) (17,615) - -
Employee severance
benefits, net (10,227) (11,467) (1,458) (1,656)
Other temporary
differences 3,708 699 - -
------------- ------------- -------------- --------------
43,879 37,317 (7,575) (6,999)
============= ============= ============== ==============
In the consolidated balance sheet, deferred taxes are computed at rates ranging between
approximately 27% and 35% (Company - 27%).
F-194
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
H. Composition of tax expense (benefit)
Consolidated
For the year ended December 31
---------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
US$ thousands US$ thousands US$ thousands
-------------- -------------- --------------
Taxes in respect of the reported period:
Current 28,944 51,228 24,702
Deferred 5,142 (3,034) 3,173
-------------- -------------- --------------
34,086 48,194 27,875
-------------- -------------- --------------
Taxes in respect of prior years:
Current 3,178 1,269 4,683
Deferred 2,688 2,871 60
-------------- -------------- --------------
5,866 4,140 4,743
-------------- -------------- --------------
39,952 52,334 32,618
============== ============== ==============
Company
For the year ended December 31
---------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
US$ thousands US$ thousands US$ thousands
-------------- -------------- --------------
Current 3,058 2 29
Deferred 968 (749) (2,507)
-------------- -------------- --------------
4,026 (747) (2,478)
============== ============== ==============
I. Theoretical tax
Following is a reconciliation between the theoretical tax and the tax expense included in the statement
of income:
Consolidated
For the year ended December 31
---------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
34% 35% 36%
-------------- -------------- --------------
US$ thousands US$ thousands US$ thousands
-------------- -------------- --------------
Tax expense computed at regular tax rate 85,777 76,608 49,030
Tax benefit for approved enterprises (8,469) (10,203) (3,727)
Benefit for plants in development areas - - (2,109)
Difference between financial statement
measurement of income and tax basis 207 2,559 (4,868)
Change in rate of deferred taxes (4,793) (1,912) 2,384
Income taxable at other tax rates (32,630) (20,732) (14,490)
Taxes in respect of previous years 5,866 4,140 4,743
Utilization of tax losses for which deferred
taxes were not created (3,048) - -
Nondeductible expenses and other differences (2,958) 1,874 1,655
-------------- -------------- --------------
39,952 52,334 32,618
============== ============== ==============
F-195
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
I. Theoretical tax (cont'd)
Company
For the year ended December 31
---------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
34% 35% 36%
-------------- -------------- --------------
US$ thousands US$ thousands US$ thousands
-------------- -------------- --------------
Tax expense computed at
regular tax rate 71,236 57,673 36,107
Difference between financial
statement measurement
of income and tax basis 3,026 353 166
Equity in earnings of
investee companies, net (73,903) (57,192) (37,446)
Nondeductible expenses
and other differences 3,667 (1,581) (1,305)
-------------- -------------- --------------
4,026 (747) (2,478)
============== ============== ==============
J. Final assessments
Makhteshim, Agan and Lycored have received final tax assessments up to
and including the 2001 tax year. Luxembourg has received final tax
assessments up to and including 1998.
K. Losses and deductions available for carryforward to future years
As at the balance sheet date, the losses for tax purposes which are
available for carryforward to future tax years, amount to $57.3
million.
The Company has recorded a deferred tax asset with respect to the
accrued losses, in the amount of US$16.7 million, based on Management's
estimation it is probable that such losses will be utilized in the
upcoming years.
L. Additional Information
Regarding fiscal claims against Milenia - see Note 19D(2).
Note 18 - Employee Termination Benefits, Net
A. Composition
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- -------------- --------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- -------------- --------------
Accrued severance pay and
retirement grants 25,898 26,576 4,136 4,591
Less - deposits in severance
pay funds 16,198 15,957 - -
------------- ------------- -------------- --------------
9,700 10,619 4,136 4,591
Early retirement pension 15,197 13,248 - -
Accrual for unutilized sick leave 3,117 2,842 - -
------------- ------------- -------------- --------------
28,014 26,709 4,136 4,591
============= ============= ============== ==============
F-196
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 18 - Employee Termination Benefits, Net
B. Severance pay and retirement grants
The Company and its subsidiaries in Israel make regular deposits with
"Nativ" (the Pension Fund of the Workers and Employees of the Histadrut
Ltd.) and insurance companies. These deposits are intended to provide
employees with pension rights or severance pay upon reaching retirement
age. Amounts deposited in the pension fund and insurance companies are
not included in the balance sheet because they are not under the
management or control of the companies.
Employees dismissed before attaining retirement age are eligible for
severance benefits, computed on the basis of their most recent salary.
Where the amounts accumulated in the pension fund are not sufficient to
cover the computed severance benefits, the companies will cover the
difference. Experience has shown that the majority of salaried
employees continue to work until retirement age and the companies have
not been required to cover substantial differences in severance pay to
employees who retire prior to reaching retirement age. Management of
the Company and the subsidiaries accordingly believe that it is
unlikely that it will be necessary to cover such differences and
therefore no accrual has been made in the financial statements.
In addition to their abovementioned pension rights, employees are
entitled to receive retirement grants at the rate of 2.33% of their
salary at retirement age. The accrual in the balance sheet covers the
companies' obligations with regard to these retirement grants, as well
as their liability to pay severance benefits to some of their employees
for the period prior to the date on which these employees joined the
pension plan, during which period no deposits had been made in the fund
in the name of the employee.
C. Deposits with severance pay fund and retirement grants
The deposits in the severance pay funds include accrued linkage
differences and interest and are made in severance pay funds with banks
and insurance companies. Withdrawal of the amounts on deposit is
contingent upon the fulfillment of the provisions set forth in the
Severance Pay Law.
D. Compensation for unutilized sick leave
The financial statements include an accrual for compensation in respect
of unutilized sick leave for employees who are 55 and older. No accrual
is made in respect of employees under the age of 55 as it is uncertain
as to whether or not they will receive such compensation (by reason of
utilization of sick leave or early retirement). The accrual is
computed, using the latest wage rates, on the basis of eight work days
for each year of employment in which sick leave was not utilized.
E. Early retirement pension
The financial statements include a provision for payment of pension
benefits to a number of employees whose work was terminated before they
reached retirement age. The provision was calculated by reference to
the period from the time their work was terminated until the date
stipulated in the agreement, on the basis of the present value of the
pension payments (the interest rate used in the present value
calculation was 3.6% per annum).
At the beginning of 2004, the Knesset passed a law according to which
the Articles of Association for pension funds were changed, such that
the retirement age will be gradually raised for men from 65 to 67 and
for women from 60 to 62.
In the estimation of the subsidiary Management, the above-mentioned law
will have no effect on the subsidiary's liabilities for early
retirement in connection with its employees who left prior to reaching
retirement age.
F-197
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities
A. Commitments
(1) The Articles of Association of the Company and its
subsidiaries permit, subject to the governing companies' laws,
including the provision of the Companies Law, indemnification
and insurance of the responsibilities of directors and
officers therein, provided that if the Company decides to
provide advance indemnification, the amount of such
indemnification shall be limited to 25% of the Company's
shareholders' equity as at the date the indemnification is
granted.
(2) Liability of directors and officers of the Company and its
subsidiaries is insured as part of a policy. The limit of the
insured responsibility is $100 million. The directors who were
insured within the policy include all of the Company's
directors as well as the directors of the subsidiaries.
(3) Regarding undertakings of the Company and its subsidiaries as
part of a securitization transaction - see Note 3(1).
(4) Regarding undertakings with interested parties - see Note 30A.
B. Contingent liabilities
(1) In accordance with the Law for the Encouragement of Capital
Investments, 1959, Company subsidiaries received grants from
the State of Israel in respect of investments in fixed assets
made as part of plant expansion plans approved by the
Investments Center. Receipt of the grants is conditional upon
fulfillment of the terms of the letter of approval that
include, among others, exports at certain rates. If the
companies do not comply with the required terms, they will be
required to refund the grants amounts, together with interest
from the date of their receipt. Management of the subsidiaries
believes that they are in compliance with the conditions of
the approval.
(2) In accordance with the Law for the Encouragement of Research
and Development in Industry, 1984, subsidiaries received
grants from the State of Israel in respect of their research
and development expenses incurred on projects approved by the
Industrial Research and Development Administration. Receipt of
the grants is conditional upon compliance with the terms of
the letter of approval which include, among other things, the
payment of royalties to the State at rates of between 2%-3.5%
of the sales of products, up to the amount of the State's
participation.
The balance of the State's participation in the companies'
research and development expenses (net of royalties paid in
respect thereof), after deduction of participations in
expenses of unsuccessful research projects which were
abandoned, amounts to approximately $4.6 million.
F-198
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
B. Contingent liabilities (cont'd)
(3) The Company has undertaken to indemnify the economic
consultants who determined the exchange ratio for the
Arrangement (see Note 1B) for reasonable expenses that they
may be required to pay for legal consultation and
representation in the event that legal proceedings are brought
against them in connection with their opinion. In addition,
the Company will indemnify the economic consultants for any
damages payable in consequence of legal proceedings which
exceed $1.5 million. The Company shall not be liable to
indemnify the economic consultants if it is determined that
they acted with gross negligence or willful misconduct in
connection with their opinion.
(4) A subsidiary has an agreement pursuant to which it will pay
royalties at the rate of 4% of sales, with certain reductions
stated in the agreement, with respect to a product whose
development rights were acquired by the subsidiary, for a
period of 10 years beginning from the year 2000, the date on
which sales of the product to outsiders reached the level of
sales stipulated in the agreement. Under certain conditions,
the royalties may be reduced to a rate of not less than 2%.
(5) In Israel the Stamp Duty on Documents Law - 1961 (hereinafter
- the Law) applies to various documents at various rates,
according to the type of the document and the amount specified
or not specified in it. In June 2003 Section 15A of the Law
regarding the identity of those required to pay stamp duty was
amended.
Beginning from June 2003 the Israeli Tax Authorities increased
enforcement of the law. The amendment to the Law and the
enforcement measures taken by the Tax Authorities were raised
for discussion at the Supreme Court, which has not yet
established its opinion on the matter.
In August 2004 the Customs and VAT Department requested from a
subsidiary to produce documents the company had signed after
June 1, 2003. The Customs and VAT Department contends that the
Law requires the payment of stamp duty on the requested
documents. Furthermore, the company was issued a stamp duty
notice with respect to a document it had signed with a third
party.
On December 12, 2005, the Knesset Finance Committee approved
The Stamp Tax on Documents Order (Cancellation of Addendum A
to the Law) (Amendment, 2005), pursuant to which the liability
for Stamp Tax will be cancelled with respect to documents that
are signed commencing January 1, 2006 and thereafter.
In the opinion of management of the Company, which is based on
the opinion of its legal counsel, the Company has no material
exposure in respect of any demand arising from the Stamp Duty
Law.
F-199
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
C. Environmental quality
(1) The operations of the Company and of its investee companies
are exposed to risks related to environmental contamination,
since they produce, store and sell chemicals. The Group
invests substantial sums in order to comply with environmental
laws and regulations, and management believes that the Group
companies are in compliance with those laws. In accordance
with the estimate of the Company's insurance advises, the
Group insurance policies cover any sudden, unexpected
environmental contamination caused in Israel and the rest of
the world, subject to the conditions of the relevant policies.
As at December 31, 2005, the Group did not have any coverage
against ongoing environmental contamination. Such insurance is
difficult to obtain, and in cases when it can be obtained,
Company Management believes that the terms of the policy,
including the amount of the insurance coverage, do not
presently justify obtaining such a policy.
(2) Pursuant to an agreement with the Ministry of Environmental
Protection, subsidiaries decided to construct facilities for
the biological treatment of waste. Construction of the
facility will take approximately 3 years. In the estimation of
the subsidiary's management, the aggregate construction cost
will be between $30 million and $40 million.
(3) One of the subsidiary's plants, together with other chemical
plants, was constructed in Ramat Hovav, since the Government
of Israel determined that the location was suitable for
chemical plants as it was assumed that the layers of the soil
in that area were absolutely sealed against penetration by
liquid discharges or contamination. The Ministry of
Environmental Protection conducted tests as a result of which
it was reported that data exist indicating subterranean
contamination in Ramat Hovav. The inspectors recommended that
steps be taken to prevent further leakage from active and
dormant installations that are likely to constitute a source
of contamination of the subterranean water in the region.
The subsidiary may be required to clean up the relevant areas
or subterranean layers if and when it is found that the
subsidiary is responsible for the contamination. Over the past
several years various tests have been performed by different
agencies to test the ground contamination in the Ramat Hovav
area as well as the area surrounding the subsidiary's premises
in Be'er Sheva. Based on studies performed by researchers,
including foreign research institutes, there is no effective
process for cleaning the contaminated soil. The only
remediation available is the natural cleansing processes which
will clean the land over a period of 80 years. In the opinion
of Company Management, no material consequences on the
financial statements are expected due to application of the
recommendations deriving from the said examinations.
(4) In May 2004, a subsidiary and other factories in the Ramat
Hovav area received a notification of a change in the terms of
the license, according to which the factories will be required
to treat their waste, in contrast with the current treatment,
independently and through application of evaporation
procedures, in the framework of which the factories are
required to perform within a short time, research and
development for purposes of conformance of the procedures to
the composition of each factory's waste, and later on to
construct an appropriate facility, as well as application of
formulation procedures, in the framework of which the
factories are required to present research and development
plans to the Ministry for purposes of application of the
procedures with respect to the waste. At the same time, the
Ministry of Environmental Protection set a date by which the
factories are required to treat their waste in the required
format and to stop the flow of waste into the evaporation
pools and waste treatment facilities of the Council of Ramat
Hovav.
F-200
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
C. Environmental quality (cont'd)
(4) (cont'd)
On October 10, 2004, the subsidiary, together with the Israeli
Union of Industrialists and other companies, filed an
administrative petition with the District Court of Be'er Sheva
against the Ministry of Environmental Protection. The subject
of the petition is in respect of the additional conditions for
receipt of a business license that were imposed on the
petitioning factories in May 2004 that deal with treatment and
removal of waste accumulated as a result of their operations.
As part of the petition, the Court was requested to issue an
order declaring that the additional conditions are null and
void.
On March 3, 2005, the Court approved the Parties' consent to
attempt to settle the dispute through "out of court"
mediation. In the framework of the mediation, the Ministry of
Environmental Protection hired the services of a Dutch company
having expertise with respect to the matter. The Dutch
company's conclusions supported the Company's position that
there is no treatment method of pressurized ventilation and
crystallization for the type of waste material produced by the
Ramat Hovav factories and it recommended to remain in the
Ramat Hovav pools while improving the quality of the waste
material and preventing the escape of odors and pollution into
the environment. The matter is currently in the mediation
process. Agreement regarding the proposed method will also
update the conditions of the business license accordingly.
In the estimation of Company Management, based on the advice
of its legal advisors, in light of the early stage of the
proceedings, it is not possible at this stage to predict the
chances of the administrative petition succeeding.
In the Company's estimation, if the petition is rejected, such
rejection will have a material impact on the activities of the
factory in Ramat Hovav and/or investments will be required,
the scope of which the Company is unable to estimate at this
point.
(5) On November 28, 2004, a Government decision was received that
approves a plan in connection with reduction of damaging air
and water pollution agents deriving from the Ramat Hovav area.
A. Treatment of Factory Waste
--------------------------
1. By June 30, 2006, flow of the untreated waste into the
joint biological treatment facility will be discontinued,
and every factory will treat its waste up to the quality
level determined by the Ministry of Environmental
Protection (as determined in additional terms of the
business license from May 2004).
2. By December 31, 2007, flow of the runoff into the
existing evaporation pools will be discontinued, and
every factory will treat its runoff up to the quality
level determined by the Ministry of Environmental
Protection (as determined in additional terms of the
business license from May 2004).
F-201
Note 19 - Commitments and Contingent Liabilities (cont'd)
C. Environmental quality (cont'd)
B. Rehabilitation of the Existing Evaporation Pools
------------------------------------------------
1. From January 1, 2005, the Ramat Hovav Industrial Council
will commence activities to dry out and rehabilitate the
area of the evaporation pools spanning an area of about
1,500 dunams, in an attempt to complete such drying out
and rehabilitation activities no later than the end of
2012.
2. The Ramat Hovav Industrial Council will submit a detailed
plan along with timetables for the drying out and
rehabilitation of the area of the evaporation pools for
approval by the Ministry of Environmental Protection by
December 31, 2004.
C. Treatment of Air Pollution
--------------------------
The Ministry of Environmental Protection will formulate and
operate a plan for prevention of exceptional emissions of
dangerous substances into the air in the Ramat Hovav Industrial
Area.
Regarding the possible consequences of the said Government
decision on the Company's activities, see Section 4, above.
D. Claims against subsidiaries
(1) In 1995, a claim was submitted against Milenia and a number of
other parties for a total amount of approximately $45 million
by a group that purchased the rights of two banks which went
bankrupt. The remainder of the claim is being submitted
against Milenia in its capacity as a guarantor for
agricultural cooperatives, which were its former shareholders.
Milenia's position is that it was excluded from the guarantee
agreement by a later agreement between the bank, the former
shareholders and the other subsidiary of the former
shareholders. A provision of approximately $1.6 million was
recorded in the financial statements for this claim, based on
a possibility of settlement in due course. Milenia's position,
based on an analysis by their legal advisors, is that, the
provision recorded is sufficient to cover any probable losses
it may have on this case.
(2) Administrative proceedings as well as civil and other fiscal
claims have been submitted against Milenia totaling
approximately $63.9 million. Milenia's management believes
based on, inter alia, the opinion of its legal advisors, that
its chances of winning in the administrative proceedings and
successfully defending against the aforesaid claims and
demands, are probable and the provisions included in the
financial statements are sufficient to cover any losses, which
may be incurred as a result of these claims.
F-202
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
D. Claims against subsidiaries (cont'd)
(3) During 2003, a criminal complaint has been filed against
Makhteshim and one of its managers by the Man, Nature and Law
Amuta (Society). In the charge sheet, it is stated that in a
number of cases during 1999-2003, discharges of materials were
measured in the exhaust vents in Makhteshim's factory in Ramat
Hovav in forbidden concentrations that created strong
pollution. Makhteshim does not admit to the allegations stated
in the complaint. In the estimation of Makhteshim and its
legal advisors, it is not possible to predict the results of
the complaint but on the basis of the presently accepted
degrees of punishment it is highly probable that even if the
Company is convicted this will not have a material effect on
the Company, therefore, no provision has been recorded in the
books in respect thereof.
(4) A number of other claims have been filed against Agan, the
total amount of which is $3.5 million, in respect of damages
which, according to the plaintiffs, were caused due to use of
Agan's products, breach of agreement to market a product,
supply of a faulty product, as well as in connection with
additional claims.
In Agan's estimation, based on the opinion of its legal
advisors, with respect to some of these claims the chances of
defense are good, while regarding some of the claims it is not
possible, at this stage, to predict their outcome.
Accordingly, no provisions have been recorded on the books in
connection with these claims.
(5) A number of other claims have been filed against Makhteshim,
the total amount of which is $3.3 million, in respect of
damages which, according to the plaintiffs, were caused by,
among other reasons, use of its products as well as a claim of
a supplier which provided the planning work with respect to
construction of the plant in Ramat Hovav. In Makhteshim's
estimation, based on the opinion of its legal advisors, with
respect to some of these claims the chances of defense are
good or the provisions included in the books are adequate.
With respect to claims regarding which it is not possible, at
this stage, to predict their outcome, no provisions have been
included in the financial statements.
(6) In April 2005, the subsidiary received a notice that an
international chemical company had started an international
arbitration proceeding against the Company in connection with
a license and supply agreement signed in 1998. According to
the notice, the amount of the claim is $10.6 million.
Subsidiary recorded an appropriate provision in its books
based on the opinion of its legal advisors.
E. Guarantees
(1) The Company has guaranteed the liabilities to banks of a
subsidiary without any limitation as to amount. As at the
balance sheet date, the outstanding liabilities of the
subsidiary to the banks totaled $66.6 million.
(2) The Company has guaranteed the liabilities to banks and
suppliers of subsidiaries, the amount of which as at the
balance sheet date totaled $33.3 million.
(3) Makhteshim and Agan have guaranteed the liabilities to banks
of subsidiaries in the amount of $28.6 million.
F-203
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
(4) Foreign suppliers and banks have provided credit lines in the
approximate amount of $97.6 million to foreign subsidiaries
and to one subsidiary in Israel relying upon, among other
things, the commitments of Makhteshim and Agan as to their
proper fiscal management and the policies of Makhteshim and
Agan to take steps that will enable those companies to meet
their obligations. The amount of the credit lines utilized as
at December 31, 2005, amounted to approximately $27.2 million.
(5) The Company and Milenia committed to indemnify financial
institutions, upon the existence of certain conditions, in
respect of credit received by Milenia's customers from those
financial institutions, which were used for repayment of the
debts of such customers to Milenia in respect of its sales to
those customers. The amount of the commitment for
indemnification, as at the balance sheet date, was
approximately $76 million, of which approximately $59.1
million was a commitment for indemnification of Milenia and
approximately $16.9 million was a commitment for
indemnification of the Company and Milenia (December 31, 2004
- approximately $98 million, of which approximately $80
million was a commitment for indemnification of Milenia and
approximately $18 million was a commitment for indemnification
of the Company and Milenia).
(6) Subsidiaries have undertaken to indemnify the bank in the
framework of the transaction for sale of trade receivables in
certain cases that are defined in the agreements, if debts
sold are not paid. See Note 3(B).
Note 20 - Liens and Collaterals
A. Following are details of collateralized liabilities to banks:
December 31
2005
-------------
US$ thousands
-------------
Long-term liabilities
(including current maturities) 37,600
=============
As collateral for the above liabilities, a subsidiary has registered a
mortgage on land and buildings, and other subsidiaries have registered
a first-degree charge on assets including machinery and equipment,
share capital and intangible assets.
- The Company and its Israeli subsidiaries have made commitments to
banks not to register charges on their assets in favor of other
parties, except specific liens for acquisition of an asset for the
benefit of the party financing the acquisition on certain terms
and subject to the giving of notification to the bank, and except
for creation of liens related to receipt of investment grants, as
stated in Section B, below.
F-204
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 20 - Liens and Collaterals (cont'd)
A. Following are details of collateralized liabilities to banks
(cont'd):
In addition, the Company committed not to transfer or sell any
one of its assets (except for sales in the Company's ordinary
course of business and at customary market terms, including
sale of trade receivables), without obtaining the bank's
written consent in advance, except for the following:
(a) Transfer to a subsidiary which did not create and
will not create general liens and which commits not
to pledge or sell the pledged assets without
obtaining the bank's consent in advance.
(b) Sale or transfer of assets, the value of the
Company's interest in which does not exceed US$20
million for any particular year and provided that the
cumulative value of the total assets to be
transferred or sold will not exceed US$ 60 million.
- Regarding bank deposits which serve as the sole security for
repayment of loans taken by a subsidiary from that bank - see
Note 8B(2).
B. As collateral for the fulfillment of the requirements in
respect of investment grants received (see Note 17A), the
Company and its subsidiaries have registered floating charges
in unlimited amounts on all of their assets and have provided
an unlimited guarantee in favor of the State of Israel.
C. The Company and it's subsidiary have committed to banks to
maintain financial criteria, the main ones of which are as
follows:
- The ratio of the interest-bearing financial
liabilities to shareholders' equity shall not exceed
1.5.
- The ratio of the interest-bearing financial
liabilities to income before financing expenses,
taxes, depreciation and amortization (EBITDA) shall
not exceed 3.3 (in subsidiary - 4).
- The shareholders' equity will not be less than US$
720 million.
As at the balance sheet date the Company and it's subsidiary
are in compliance with the aforementioned financial ratios.
F-205
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 21 - Shareholders' Equity
A. Share capital
December 31 December 31
----------------------------- ------------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Number of shares Number of shares
----------------------------- ------------------------------
Authorized Issued and paid-up
----------------------------- ------------------------------
Ordinary shares of NIS 1 par value 750,000,000 500,000,000 452,918,621 402,088,045
All of the shares are registered for trading on the Tel Aviv Stock
Exchange.
On August 8, 2005, the Company's Board of Directors decided to increase
the Company's authorized share capital from NIS 500 million divided
into 500 million ordinary shares of NIS 1 par value each to NIS 750
million divided into 750 million ordinary shares of NIS 1 par value
each.
B. Employee stock options
1. On April 23, 2001 (hereinafter - the determining date), the
Company's Board of Directors resolved to grant options to
employees of the Company and to employees of its subsidiaries
(hereinafter - plan 2001). In accordance with this plan, the
said employees can be allotted upto 17,400,000 option warrants
which are exercisable for up to 17,400,000 ordinary shares of
a par value of NIS 1 each, of the Company, at an exercise
price of $ 1.749 as at the balance sheet date after
adjustments made to all options due to a dividend distribution
(the market value of a share as of April 22, 2001 was NIS
8.12).
All options warrants are required to be issued to a trustee
pursuant to plan 2001. The options were issued in accordance
with Section 102 of the Income Tax Ordinance and the shares to
be issued on the exercise thereof will be held by the trustee
for a period of at least two years from the date of issuance
of the options.
Eligibility to receive the option warrants, subject to the
terms of the plan, is in three portions, as follows: One third
on the determining date, an additional third one year after
the determining date and the balance two years after the
determining date.
The options of each portion can be exercised one year after
the date of entitlement, and they expire after five years from
the date of the beginning of the exercise period of each
portion.
Pursuant to option plan 2001, at the time of exercise of the
options the Company will issue shares in a number that
reflects the amount of the monetary benefit inherent in the
option, that is, the difference between the regular price of a
Company share on the exercise date and the exercise price of
the option.
Under this plan, the CEO of the Company was allotted 1,400,000
option warrants exercisable into 1,400,000 ordinary shares of
a par value of NIS 1 each of the Company, which constitute 8%
of the total amount of options to be granted under the plan.
In 2003, 7,361,923 options were exercised by Company employees
for 2,551,236 of the Company's ordinary shares of NIS 1 par
value each.
In 2004, 4,519,791 options were exercised by Company employees
for 2,505,937 of the Company's ordinary shares of NIS 1 par
value each.
F-206
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
B. Employee stock options (cont'd)
In 2005 approximately 2,531,914 thousand options were
exercised by Company employees for 1,736,805 thousand of the
Company's ordinary shares of NIS 1 par value each.
Subsequent to the balance sheet date and up to a time
proximate to the signing date of the financial statements,
approximately 455,001 thousand options were exercised by
Company employees for 319,763 thousand of the Company's
ordinary shares of NIS 1 par value each.
2. On April 14, 2003 (hereinafter - "the determination date"),
the Company's Board of Directors resolved to adopt an employee
compensation plan for the employees of the Company and its
subsidiaries and for their directors (hereinafter - "Plan
2003"), pursuant to which 17,000,000 options will be issued to
the employees, which are exercisable for up to 17,000,000 of
the Company's ordinary shares of NIS 1 par value each, at an
exercise price of NIS 7.72 as at the balance sheet date after
adjustments made due to a dividend distribution (the closing
share price of the Company's shares on the stock exchange on
the Determination Date, was NIS 9.13 per share).
All of the options will be issued under Section 102 of the
Income Tax Ordinance. The options issued and the shares issued
upon the exercise thereof will be held by a trustee for a
period of at least two years from the end of the year in which
the options are issued.
In accordance with Plan 2003, at the time of exercise of the
options, the Company will issue shares in an amount which
reflects the amount of the monetary benefit implicit in the
options, that is, the difference between the price of an
ordinary share of the Company on the exercise date and the
exercise price of the option.
In the framework of Plan 2003, Company employees who were
issued options under the Company's prior employee compensation
plan 2001, were offered the opportunity to convert the options
issued to them under the Plan 2001 into 12,180,000 options
under the plan 2003. The offer was not accepted by any of the
Company's employees.
The right to exercise the options, with respect to offerees
who are not included with those who received options under the
plan 2001 and are converting them to options issued under the
plan 2003, is in three increments, as follows: one-third at
the end of one year from the Determination Date, an additional
one-third at the end of two years from the Determination Date
and the balance at the end of three years from the
Determination Date. The expiration date of the options is five
years from the beginning of the exercise period of each
increment.
In addition, in the framework of the plan 2003, the Company's
CEO was issued 1,600,000 options which are exercisable for up
to 1,600,000 of the Company's ordinary shares of NIS 1 par
value each and which constitute 9.4% of the total options
issued in the framework of the Plan.
F-207
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
B. Employee stock options (cont'd)
2. (cont'd)
In addition, in the framework of the Plan, the Company's
directors were issued a total of 1,800,000 that which
constitute 10% of the total options issued in the framework of
the Plan.
On March 8, 2004, the Company's Board of Directors decided to
make an additional issuance under plan 2003 of 1,420,000
options to the directors (that did not serve at the time of
prior issuance to the directors) and to Company employees, the
options were distributed during 2004.
In 2004, 105,663 options were exercised by Company employees
for 64,746 of the Company's ordinary shares of NIS 1 par
value.
In 2005 Company employees exercised 219,996 options for
156,868 of the Company's ordinary shares of NIS 1 par value.
Subsequent to the balance sheet date and proximate to the
signing date of the financial statements, 1,044,187 options
were exercised by Company employees for 764,389 ordinary
shares of NIS 1 par value.
3. On March 13, 2005, the Company's Board of Directors resolved
to adopt a new stock option plan for the officers and
employees of the Company and its subsidiaries (hereinafter:
plan 2005). Pursuant to plan 2005, on March 14, 2005,
14,900,000 options exercisable into up to 14,900,000 of the
Company's ordinary shares of NIS 1 par value each were issued
- 800,000 options were issued to the Company's CEO, 11,600,000
were issued to employees of the Company and subsidiaries in
Israel and overseas and the balance of 2,500,000 were issued
to a trustee for purposes of future issuances.
The options are offered to the offerees at no cost.
The exercise price of the options is as follows:
Regarding the options issued to the Company's CEO and 7
additional employees (hereinafter - "Group A") the exercise
price will be equal to the opening price of the Company's
shares on April 15, 2006, and if there is no trading on that
date - on the first trading day thereafter.
Regarding the options issued to the other offerees
(hereinafter - "Group B") the exercise price will be equal to
NIS 25.10 (subject to adjustments in respect of dividend
distributions), which is equal to the opening price of the
Company's share on the stock exchange when the decision was
made by the Company's Board of Directors (March 13, 2005).
F-208
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
B. Employee stock options (cont'd)
3. (cont'd)
Regarding offerees who will be issued options in the future, as
stated above, (hereinafter - "Group C") the exercise price will be
equal to the closing price of the Company's shares on the eve of
the decision to issue options to them.
The right to exercise the options subject to the terms of the plan
is in three portions, as follows: one-third at the end of two
years from the determination date, an additional third at the end
of three years from the determination date and the balance at the
end of four years from the determination date. The expiration date
of each portion is 5 years from the beginning of its exercise
period.
The determination date for Group A was fixed as April 14, 2006
(which is the end of the third and final vesting period of the
employee options' plan from 2003) and for Group B and Group C, the
determination date is March 13, 2005 (the approval date of the
plan).
On August 8, 2005, the Company's Board of Directors decided to
revise the exercise price of the options issued to Group A such
that the exercise price of these options will be equal to the
exercise price determined for options issued to Group B. As at the
balance sheet date, the exercise price after adjustments, as
stated above, is NIS 24.62.
The options under plan 2005 will be issued to the offerees
pursuant to the provisions of Section 102 of the Income Tax
Ordinance under the capital track.
On March 8, 2006 the Company's board of directors decided to issue
the balance of 2,500,000 options to employees (Group C).
C. Purchase of Company shares by a subsidiary
In March 2004 a subsidiary transferred to a third party, off the stock
exchange, 7 million of its shares in the Company (hereinafter - the
transferred shares). In accordance with the agreement, the
consideration will be paid within one year from the date of transfer
either in cash, linked to the price of the share on the stock exchange
as at that date, or in shares of the Company plus 0.5% of the price of
the shares on the stock exchange.
In the second quarter of 2004, 1,908 thousand of the aforementioned
shares were returned in order to pay the consideration for purchasing a
group of companies in the USA as mentioned in Note 7D(1)a.
In the first quarter of 2005, 693 thousand of the aforementioned shares
were returned in order to pay the consideration for purchasing Mabeno,
see Note 7D(2)a.
In the third quarter of 2005 the rest of the transferred shares
were returned to the subsidiary.
As at balance sheet date the subsidiary holds 4,415 thousand par value
of the company's shares which constitute about 1% of the issued and
paid up share capital of the company.
F-209
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
D. Buy-Back of Shares
On November 14, 2005, the Company's Board of Directors decided to adopt
a policy according to which the Company will act to buy back its own
shares in the amount of $150 million.
The decision of the Board of Directors provides different parameters
for acquisition of the shares as stated above including, among others,
acquisition in response to supply without creation of demand,
limitations on the scope of daily acquisitions, price criteria and
execution of off-market transactions.
The shares acquired will become dormant shares as long as they are held
by the Company.
As at the balance sheet date, the Company holds 12,018,603 of its own
shares, constituting approximately 2.6% of its total issued and paid-up
share capital in the amount of $65.6 million. As at March 6, 2006, the
Company holds 15,200,909 shares.
E. Dividend distribution policy
On April 23, 2001, the Company's Board of Directors resolved to adopt a
dividend policy at rates of between 15% and 30% of annual net income,
beginning from 2001. In accordance with this policy, an interim
quarterly dividend will be distributed. The amount of the dividend will
be calculated according to the net income for the quarter and will be
within the limits specified above. This interim dividend will be
considered as an advance on account of the annual dividend.
Application of policy is subject to there being sufficient income for
distribution on the relevant dates, to the provisions of any law
regarding dividend distribution, to specific decisions of the Company's
Board of Directors in respect of each distribution and to any other
decision the Board of Directors is permitted to make at any time,
including regarding a different designation of the Company's earnings
and a change in this policy.
On March 8, 2006, the Company's Board of Directors decided to make a
change regarding the dividend distribution policy, such that commencing
with the fourth quarter of 2005, a dividend will be distributed at the
rate of 50% of the net earnings for the period.
In March 2005, the Company's Board of Directors decided to distribute a
dividend in respect of the earnings of 2004, in the amount of $12,700
thousand.
During 2005, the Company's Board of Directors decided to make four
interim dividend distributions, in the total amount of US$ 60,200
thousand.
Subsequent to the balance sheet date, the Company's Board of Directors
resolved to distribute a dividend in respect of the earnings of the
fourth quarter of 2005, in the amount of $23,500 thousand.
F. Convertible debentures and options (Series 1)
Regarding the convertible debentures and the options (Series 1) issued
in the framework of a prospectus from November 2001 - see Note 15B.
In 2005, 13,379,572 options (Series 1) were converted into 13,379,572
ordinary shares of NIS 1 par value for an average exercise price of NIS
9.61 per share. The total share capital issued as a result of the
conversion was $2,910 thousand, at a premium of $31,014 thousand.
On November 20, 2005, the balance of the unexercised options expired.
Regarding conversion of the debentures - see Note 15B(4).
F-210
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
----------------------------------------------------------------------------------------------------------------------------
Note 22 - Linkage Terms of Monetary Balances
Consolidated
In or linked In Euro In Brazilian In or linked In Israel Total
to US reals to another currency
dollars currency
------------- ------------- ------------- ------------ ------------- -------------
US$ thousands US$ thousands US$ thousands US$thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------ ------------- -------------
DECEMBER 31, 2005
Assets:
Cash and cash equivalents 21,614 13,408 9,754 23,062 3,455 71,293
Short-term investments - 561 - - 708 1,269
Trade and other receivables 160,869 75,585 130,374 51,097 27,635 445,560
Long-term investments,
loans and other receivables 2,204 2,562 13,885 1,124 2,469 22,244
------------- ------------- ------------- ------------ ------------- -------------
184,687 92,116 154,013 75,283 34,267 540,366
============= ============= ============= ============ ============= =============
Liabilities:
Credit from banks (not
including current
maturities) 197,864 13,624 11,639 5,433 478 229,038
Trade and other payables 236,591 100,305 71,147 43,714 82,256 534,013
Proposed dividend 14,058 - - - - 14,058
Long-term bank loans and
other (including current
maturities) and long-term
liabilities 88,398 4,999 3,222 1,091 1,666 99,376
Liability for employee
severance benefits, net 126 538 640 227 26,483 28,014
------------- ------------- ------------- ------------ ------------- -------------
537,037 119,466 86,648 50,465 110,883 904,499
============= ============= ============= ============ ============= =============
DECEMBER 31, 2004
Assets:
Cash and cash equivalents
(not including current
maturities) 10,751 14,799 3,418 10,624 885 40,477
Short-term investments - 603 - 160 800 1,563
Trade and other receivables 126,638 74,775 136,831 51,673 32,820 422,737
Long-term investments,
loans and other receivables 1,710 328 15,715 1,239 2,353 21,345
------------- ------------- ------------- ------------ ------------- -------------
139,099 90,505 155,964 63,696 36,858 486,122
============= ============= ============= ============ ============= =============
Liabilities:
Credit from banks 90,949 11,350 1,814 5,974 2,892 112,979
Trade and other payables 158,430 146,850 64,328 54,287 90,527 514,422
Proposed dividend 11,200 - - - - 11,200
Long-term bank loans and
other (including current
maturities) and long-term
liabilities 112,319 9,331 - 6,204 1,548 129,402
Liability for employee
severance benefits, net 78 481 310 105 25,735 26,709
------------- ------------- ------------- ------------ ------------- -------------
372,976 168,012 66,452 66,570 120,702 794,712
============= ============= ============= ============ ============= =============
With respect to futures transactions in foreign currency, see Note 32.
F-211
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------------------------
Note 23 - Revenues
Consolidated
For the year ended December 31
-------------------------------------------------
2005 2004 2003
------------ ------------- -------------
S$ thousands US$ thousands US$ thousands
------------ ------------- -------------
Foreign sales -
Industrial 1,465,333 1,351,450 1,001,435
Commercial 165,221 85,007 89,303
------------ ------------- -------------
1,630,554 1,436,457 1,090,738
------------ ------------- -------------
Domestic sales -
Industrial 48,678 47,461 40,268
Commercial 61,485 55,784 46,249
------------ ------------- -------------
110,163 103,245 86,517
------------ ------------- -------------
1,740,717 1,539,702 1,177,255
============ ============= =============
Foreign sales by geographic area:
Latin America 422,777 428,638 308,628
Europe 700,912 649,859 525,851
North America 308,798 198,035 142,280
Far East 59,120 55,467 41,398
Rest of the world 138,947 104,458 72,581
------------ ------------- -------------
1,630,554 1,436,457 1,090,738
============ ============= =============
Note 24 - Cost of Sales
Consolidated
For the year ended December 31
-------------------------------------------------
2005 2004 2003
------------ ------------- -------------
S$ thousands US$ thousands US$ thousands
------------ ------------- -------------
Industrial:
Materials 766,681 674,675 443,565
Labor 76,147 71,534 63,606
Subcontractors 10,720 5,822 6,286
Other manufacturing expenses 115,182 111,624 83,611
Depreciation 29,369 25,891 24,571
------------ ------------- -------------
998,099 889,546 621,639
Less - expenses capitalized
to fixed assets (mainly
engineering salaries) (866) (848) (958)
Change in work in progress
and finished
products inventories (96,162) (43,246) (7,528)
------------ ------------- -------------
901,071 845,452 613,153
Commercial:
Cost of merchandise sold 158,644 98,456 117,152
------------ ------------- -------------
1,059,715 943,908 730,305
============ ============= =============
F-212
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------
Note 25 - Research and Development Expenses, Net
Consolidated
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 11,627 10,508 9,868
Materials 351 267 1,210
Other expenses 9,093 9,758 6,738
------------- ------------- -------------
21,071 20,533 17,816
Less -
Government participation in R&D expenses (443) (1,053) (996)
------------- ------------- -------------
20,628 19,480 16,820
============= ============= =============
Note 26 - Selling and Marketing Expenses
Consolidated
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 64,480 52,460 37,678
Commissions and delivery costs 75,121 70,480 51,268
Advertising 20,933 14,049 9,957
Depreciation and amortization 32,936 24,685 20,916
Registration 21,753 11,504 7,568
Professional services 7,035 6,263 6,069
Insurance 7,929 6,474 5,746
Royalties to the Chief Scientist 3,894 4,758 2,802
Other 33,837 29,539 21,832
------------- ------------- -------------
267,918 220,212 163,836
============= ============= =============
Note 27 - General and Administrative Expenses
Consolidated
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 24,992 24,743 22,549
Administrative services and directors' fees to Koor 2,548 2,557 2,676
Depreciation and amortization 4,563 3,359 3,446
Bad and doubtful accounts 5,909 11,481 7,752
Professional services 8,550 12,058 6,756
Insurance 2,903 1,925 950
Other 11,921 10,792 9,770
------------- ------------- -------------
61,386 66,915 53,899
============= ============= =============
s F-213
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------
Note 27 - General and Administrative Expenses (cont'd)
Company
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 5,333 6,073 7,401
Administrative services and directors' fees to Koor 2,548 2,557 2,676
Depreciation and amortization 226 269 276
Professional services 2,109 3,607 1,234
Other 2,774 2,865 2,340
------------- ------------- -------------
12,990 15,371 13,927
============= ============= =============
Note 28 - Financing Expenses (Income), Net
Consolidated
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
In respect of long-term liabilities, net 6,646 17,885 17,604
In respect of short-term liabilities and credit, net 27,927 9,686 20,352
------------- ------------- -------------
Financing expenses, net 34,573 27,571 37,956
============= ============= =============
Company
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Expenses:
In respect of long-term liabilities 11,607 5,193 3,815
In respect of short-term liabilities and credit 245 - 936
11,852 5,193 4,751
Less:
Financing income (2,797) (10,229) (5,349)
------------- ------------- -------------
Financing expenses (income), net 9,055 (5,036) (598)
============= ============= =============
F-214
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------
Note 29 - Other Expenses, Net
Consolidated
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Expenses in respect of early retirement of employees
and payment of early pension benefits 5,936 4,802 6,721
Expenses relating to sale of trade receivables
as part of securitization transaction 150 1,825 -
Loss on sale of trade receivables as part
securitization transaction 6,839 4,374 3,850
Loss on sale of fixed assets and other, net 1,665 1,099 858
Provision for loss with respect to options granted to
employees of subsidiaries 55 2,090 330
Amortization of goodwill in investee companies 9,870 14,396 9,826
Amortization of goodwill on acquisition of products 11,533 10,164 11,782
Amortization of other assets 7,054 2,555 2,667
Sundry expenses, net 1,109 1,430 2,211
------------- ------------- -------------
44,211 42,735 38,245
============= ============= =============
Note 30 - Transactions and Balances with Related and Interested Parties
A. Transactions with interested parties
(1) In the ordinary course of business, Group companies conduct
transactions with entities that are related parties
(principally, sales of the companies' products and purchases
of raw materials and services). Up to and including 2004, the
Securities Authority has exempted the Company from providing
details of immaterial transactions involving acquisitions and
sales of goods and services at market value that the Company
is likely to execute in the normal course of its business with
Bank Leumi LeIsrael Ltd., Bank Hapoalim Ltd. and their
investee companies. In any event, the Company is required to
disclose any unusual transactions.
On October 31, 2005, an amendment was published to the
Securities Regulations (Preparation of Annual Financial
Statements), 1993, pursuant to which the Securities Authority
does not have exemption authority with respect to this matter.
(2) On April 1, 2000, the Company signed an agreement with Koor
according to which the Company will pay Koor $2.5 million per
year for consulting and management services to be rendered by
Koor to the Company. The agreement was effective up to May
2003. The agreement was extended for additional three years,
effective from May 2003.
In addition, the Company pays directors' fees to Koor
Industries Ltd. in amounts identical to those paid to public
directors, see B., below. Regarding payments made to Koor -
see Section A(9), below.
F-215
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)
A. Transactions with interested parties (cont'd)
(3) The Company has an agreement covering management fees with
Agan and Makhteshim according to which Agan and Makhteshim
paid management fees at the rate of 1.8% of the annual
revenues. In 2005, Makhteshim and Agan paid management fees to
the Company amounting to US$ 14.2 million (2004 - US$ 13.5
million, 2003 - US$ 10.0 million).
(4) The Company entered in an agreement with the former CEO of
Milenia (who is a director of the Company), covering
non-competition and confidentiality, pursuant to which on
April 30, 2002 (shortly after the termination of his service
as Milenia's CEO), he received 1,000,000 of the Company's
shares in consideration for his agreement not to compete with
the Company and to protect all the Company's confidential
information.
The agreement is valid for a period up to the later of July
2007 or the end of 3 years from the date on which he ceases to
serve as CEO, director or other position in the one of the
Group companies.
(5) In November 2002, the Company's Board of Directors appointed a
new CEO who took up his position in May 2003.
The Company entered into an employment agreement with the new
CEO, pursuant to which the CEO will serve in his position for
an unlimited period, unless one of the parties gives notice of
its wish that the employment shall not be continued, by means
of an advance notice of three months.
(6) A subsidiary has an agreement with STIM Holdings (1991) Ltd.,
a company owned by a shareholder who served as a director of
the Company until September 2003, which was extended up to
September 30, 2006, according to which his company will supply
to the subsidiary management and business organization
services, for a consideration of NIS 60,000 per month plus
linkage differences based on the CPI for December 2001. In
July 2004, the aforesaid shareholder ceased being an
interested party.
(7) A subsidiary has an agreement with S.H.M. Ltd., a company
owned by a shareholder who served as a director of the Company
until September 2003, which was extended up to September 30,
2006, according to which his company will supply to the
subsidiary management and business organization services, for
a consideration of NIS 60,000 per month plus linkage
differences based on the CPI for December 2002. In July 2004,
the aforesaid shareholder ceased being an interested party.
F-216
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)
A. Transactions with interested parties (cont'd)
(8) Regarding insurance and indemnification of interested parties
- see Note 19(A)(1) and (2).
(9) Transactions between Makhteshim and Agan with Koor and its
subsidiaries, are made in the regular course of business and
on usual business terms. Bank Hapoalim Ltd. is interesting
party of the Groupdue to its holdings in the Company through
mutual funds and provident funds that it manages. Financing
transactions with Bank Hapoalim is conducted in the ordinary
course of business under normal commercial terms. Set forth
below are details of the transactions:
Consolidated
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Management services to Koor 2,500 2,500 2,500
============= ============= =============
Other related parties:
Revenues - 6,368 5,638 7,542
============= ============= =============
Expenses -
Selling 1,303 1,863 1,593
============= ============= =============
Financing Bank Hapoalim 843 * *
=============
* See Note A(1) regarding cancellation of the exemption
B. Benefits to interested parties
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Fees to interested parties
employed by the Group (*) 1,152 1,147 *3,656
============= ============= =============
Number of interested parties 1 **4 5
============= ============= =============
Fees to directors appointed
by Koor Industries Ltd. 47 57 176
============= ============= =============
Number of directors ***5 4 5
============= ============= =============
Fees to other directors 77 75 57
============= ============= =============
Number of directors 6 6 5
============= ============= =============
(*) Including settlements in respect of employee severance
benefits with the Company's former CEO. Regarding options
issued to the Company's present and former CEOs, see Note 21B.
(**) In July 2004, two of the four directors ceased being
interested parties - see paragraphs A6 and A7 above.
(***) During the year, a director on behalf of Koor was replaced.
F-217
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)
C. Balances with related and interested parties
Consolidated
December 31 December 31
2005 2004
------------- -------------
US$ thousands US$ thousands
------------- -------------
Trade receivables (1) -
Related parties 4,134 3,403
============= =============
Trade payables -
Related parties 267 445
============= =============
Loans Bank Hapoalim 30,680 *
============= =============
Cash and cash equivalents Bank Hapoalim 3,069 *
============= =============
Other payables
Koor Industries Ltd. 748 748
============= =============
Severance pay fund administered by related companies 2,772 2,331
============= =============
(1) Highest balance during the year - trade receivables 5,205 3,403
============= =============
* See Note A(1) regarding cancellation of the exemption
Note 31 - Earnings per Share
Share capital and net income used as the basis for the computation of
basic earnings per share are as follows:
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Weighted-average par value of share capital
(in thousands) 466,423 432,776 410,373
============= ============= =============
Net income used for the computation
(US$ thousands) 207,406 166,900 105,809
============= ============= =============
Interest rates used in computing earnings per share
(linked to the US dollar) 4.5% 2.5% 1.0%
============= ============= =============
F-218
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 31 - Earnings per Share (cont'd)
Share capital and net income used as the basis for the computation of
fully diluted earnings per share are as follows:
For the year ended December 31
--------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Weighted-average par value of share capital
(in thousands) 467,302 457,548 427,772
============= ============= =============
Net income used in computing earnings per share
(US$ thousands) 207,631 168,817 106,118
============= ============= =============
Interest rates used in computing earnings per share
(linked to the US dollar) 4.5% 2.5% 1.0%
============= ============= =============
Note 32 - Financial Instruments and Risk Management
A. General
The Group has extensive international operations, and, therefore, it is
exposed to risks that derive from exchange rate fluctuations, and to
changes in interest rates, in respect of credit received. In order to
reduce the overall exposure to those risks, the Group uses financial
instruments, including derivative instruments and options (hereinafter
- "the Derivatives"). The Group does not hold financial instruments for
trading purposes.
Transactions in derivatives are undertaken with major financial
institutions in Israel and abroad and, therefore, in the opinion of
Group Management the credit risk in respect thereof is low.
B. Exchange rate risk management
The Group uses foreign currency derivatives - forward transactions and
option contracts - in order to hedge the risk that the dollar cash
flows, which derive from existing assets and liabilities and
anticipated sales and costs, may be affected by exchange rate
fluctuations.
F-219
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 32 - Financial Instruments and Risk Management (cont'd)
B. Exchange rate risk management (cont'd)
As of December 31, 2005, the Company and its subsidiaries had open
forward exchange contracts, which are intended to hedge exposure with
respect to assets and liabilities in foreign currency, as described
below:
Foreign- Foreign-
currency currency
Futures options options
transactions purchased sold
------------ ----------- ---------
Acquisition of dollars
in exchange for:
Shekels - - 10
Pounds sterling 5.9 46.7 49.1
Euro 4.9 185.2 197.2
Brazilian reals 100.3 37 -
South African rands 4.9 - 0.5
Japanese yens 0.4 3.9 4.2
Australian dollars 13.5 33.3 39.2
Polish zloty 17.8 23.6 30.5
Swedish krona 1.5 1.2 1.3
------------ ----------- ---------
149.2 330.9 332
============ =========== =========
Foreign- Foreign-
currency currency
Futures options options
transactions purchased sold
------------ ----------- ---------
Sale of dollars in exchange for:
Shekels 20.5 61 61
Pounds sterling 1 5.4 10.9
Euro - 5 30.7
South African rands 1.6 0.5 0.4
Japanese yens - - 1.8
Australian dollars - 5 4.2
Brazilian reals 35 52 15
Polish zloty 2.7 7.2 11.4
Korean Yuan - 17 17
------------ ----------- ---------
60.8 153.1 152.4
============ =========== =========
F-220
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 32 - Financial Instruments and Risk Management (cont'd)
C. Credit risks
General
-------
The Group's revenues are derived from a large number of
geographically-dispersed customers in many different countries.
Customers include multi-national companies and manufacturing companies,
as well as distributors, agriculturists and agents of plant protection
chemicals manufacturers who purchase the products either as finished
goods or as intermediate products in relation to their own
requirements.
The agricultural sector to which most of the Group's products are
directed, is characterized by lengthy periods of credit.
The financial statements contain specific provisions for doubtful
debts, which properly reflect in management's estimate, the loss
inherent in debts, the collection of which is in doubt and general
allowance, see also note 2(H). In addition, up to June 2004, the
Company insured its trade receivables by means of credit insurance in a
joint policy with the entire Makhteshim-Agan Group. Pursuant to the
policy, the aggregate amount of credit insurance for the entire Group
is an annual cumulative amount of US$ 25 million. The insurance
indemnification is limited to 90% of the debt per event. The terms of
the insurance policy require the implementation of a credit control
system for the entire Group which is required to operate in accordance
with procedures stipulated in the insurance policy. In July 2004, the
Company discontinued the said insurance because of it not being
worthwhile.
In April 2005, the Company renewed the said policy after changing the
insurance amount to approximately $30 million and increasing the
deductible to $7.5 million.
D. Currency risks
As at December 31, 2005, monetary assets in excess of monetary
liabilities in Brazilian reals amounted to approximately US$ 67.4
million, monetary assets in Israeli shekels in excess of monetary
liabilities in Israeli shekels amounted to approximately US$ 76.6
million, and monetary liabilities in excess of monetary assets in Euro
amounted to approximately US$ 27.4.
The Group has taken measures to reduce the exposure in respect to this
excess as described in Note B. above.
Regarding the linked balance sheet covering monetary balances - see
Note 22.
E. Fair value of financial instruments
The Group's financial instruments consist of mainly non-derivative
assets and liabilities, e.g.: cash and cash equivalents, investments in
deposits, other receivables, long-term investments, short-term credit,
payables, loans and other long-term liabilities, as well as
derivatives.
In view of their nature, the fair value of financial instruments
included in working capital is usually identical or close to their
carrying amount. Also the fair value of deposits and long-term
receivables and loans and other long-term liabilities is close to their
fair value, as these financial instruments bear interest at rates which
are close to the prevailing market rates.
F-221
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information
A. Geographical segments according to location of assets
For the year ended December 31, 2005
Israel Latin America Europe Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Income
Revenues from
external sources 1,057,261 369,489 313,967 - 1,740,717
Inter-segment
revenues 73,234 16,983 19,535 (109,752) -
------------- ------------- ------------- ------------- -------------
Total revenues 1,130,495 386,472 333,502 (109,752) 1,740,717
============= ============= ============= ============= =============
Segment results* 195,838 49,600 67,403 (3,183) 309,658
============= ============= ============= ============= =============
Additional
information
Assets utilized by
the segment 1,289,052 464,403 376,287 - 2,129,742
============= ============= ============= ============= =============
Liabilities of the
segment 471,831 274,089 220,139 - 966,059
============= ============= ============= ============= =============
Capital
investments 105,982 9,714 11,725 - 127,421
============= ============= ============= ============= =============
Depreciation and
amortization 75,100 7,871 12,993 - 95,964
============= ============= ============= ============= =============
* Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
assets arising on the acquisition of subsidiaries.
F-222
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information (cont'd)
A. Geographical segments according to location of assets (cont'd)
For the year ended December 31, 2004
Israel Latin America Europe Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Income
Revenues from
external sources 937,769 337,123 264,810 - 1,539,702
Inter-segment
revenues 95,558 13,084 25,722 (134,364) -
------------- ------------- ------------- ------------- -------------
Total revenues 1,033,327 350,207 290,532 (134,364) 1,539,702
============= ============= ============= ============= =============
Segment results* 146,996 56,764 61,260 (393) 264,627
============= ============= ============= ============= =============
Additional
information
Assets utilized by
the segment 1,148,344 414,428 371,795 - 1,934,567
============= ============= ============= ============= =============
Liabilities of the
segment 499,168 255,637 286,511 - 1,041,316
============= ============= ============= ============= =============
Capital
investments 139,031 8,631 7,823 - 155,485
============= ============= ============= ============= =============
Depreciation and
amortization 60,437 9,352 12,835 - 82,624
============= ============= ============= ============= =============
* Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
assets arising on the acquisition of subsidiaries.
F-223
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information (cont'd)
A. Geographical segments according to location of assets (cont'd)
For the year ended December 31, 2004
Israel Latin America Europe Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Income
Revenues from
external sources 684,619 246,757 245,879 - 1,177,255
Inter-segment
revenues 57,431 18,360 - (75,791) -
------------- ------------- ------------- ------------- -------------
Total revenues 742,050 265,117 245,879 (75,791) 1,177,255
============= ============= ============= ============= =============
Segment results* 92,520 47,466 48,326 2,475 190,787
============= ============= ============= ============= =============
Additional
information
Assets utilized by
the segment 977,530 342,542 334,832 6,461 1,661,365
============= ============= ============= ============= =============
Liabilities of the
segment 417,921 211,166 288,523 43,778 961,388
============= ============= ============= ============= =============
Capital
investments 47,685 9,300 6,316 - 63,301
============= ============= ============= ============= =============
Depreciation and
amortization 51,022 12,413 12,238 - 75,673
============= ============= ============= ============= =============
* Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
assets arising on the acquisition of subsidiaries.
- Regarding breakdown of the sales based on targets - see Note 23.
F-224
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information (cont'd)
B. Business segments
Year ended December 31
2005 2004 2003
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Sales by products
Plant protection products 1,542,859 1,357,913 1,034,702
Others (non-plant protection
products) 197,858 181,789 142,553
------------- ------------- -------------
1,740,717 1,539,702 1,177,255
============= ============= =============
December 31, 2005 December 31, 2004
Assets Assets
utilized by Capital utilized by Capital
the the
sector investments sector investments
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Segment assets and capital
investments
Plant protection products 1,889,027 112,326 1,722,458 133,188
Others (non-plant protection
products) 240,715 15,095 212,109 22,297
------------- ------------- ------------- -------------
2,129,742 127,421 1,934,567 155,485
============= ============= ============= =============
F-225
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements
A. Material Differences between Israeli GAAP and US GAAP
The Company's consolidated financial statements conform with Israeli
generally accepted accounting principles ("Israeli GAAP"), which vary
in certain significant respects from generally accepted accounting
principles in the United States of America ("US GAAP") as described
below:
1. Deferred taxes
a) Measurement differences
In accordance with Israeli GAAP:
Deferred taxes should be recognized in respect of differences
related to assets and liabilities that result from translation
of the local currency into the functional currency using
historical exchange rates and that result from (1) changes in
exchange rates or (2) indexing for tax purposes.
In accordance with US GAAP:
According to paragraph 9(f) of FAS No. 109, deferred tax
liabilities or assets are not provided for differences related
to assets and liabilities that are remeasured from the local
currency into the functional currency and that result from (1)
changes in exchange rates or (2) indexing for tax purposes.
Following the initial implementation of Accounting Standard
No. 19, "Taxes on Income", the Company recorded in 2005 in
accordance with Israeli GAAP a deferred tax liability in
respect of land by means of a cumulative effect (see Note 2R).
In accordance with US GAAP, this liability was recorded in
prior period.
b) Earnings from "Approved Enterprises"
Under the Israeli Law for the Encouragement of Capital
Investments, 1959, an "approved enterprise" which chooses the
"alternative benefits" track is exempt from income tax on
undistributed profits.
In the event that a dividend is distributed out of tax-exempt
earnings of the "approved enterprise" under the "alternative
benefits" track, the distributing company will be subject to a
25% tax on the distributed earnings. Furthermore, the
shareholders will be liable for tax at the rate of 15%.
However, if the shareholder is a company, that shareholder
will be entitled to a 15% tax credit, if and when such
dividend out of "approved enterprise" earnings is distributed
to its shareholders.
In accordance with Israeli GAAP:
Deferred taxes should not be provided in respect of the
undistributed tax-exempt earnings of an "approved enterprise"
of subsidiaries, whose earnings have been reinvested and will
not be distributed to their shareholders.
The Company has not provided deferred taxes in respect of
undistributed tax-exempt earnings attributed to the "approved
enterprise" of subsidiaries, which may be distributed, since
it is the Group's policy not to initiate such a dividend
distribution.
In accordance with US GAAP:
The company provided deferred taxes on the excess of the
financial statement carrying value over the tax basis of an
investment in domestic subsidiary as the company does not have
any means under local tax law to recover this difference in a
tax-free manner.
F-226
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
2. Share-based payments to employees
In accordance with Israeli GAAP:
No expense is recorded with respect to options granted to employees of
the Company.
In accordance with US GAAP:
The Company issued stock appreciation rights that under APB 25 and FIN
28 should be accounted as variable options to employees relating to the
future performance of work or services. In such cases, the benefit is
charged to salary expense in the statement of income. The "benefit
component" is measured as the difference between the market price of
the share and the exercise price of the option at the end of each
reporting period, and the proportional part of the period which has
passed, in relation to amounts previously recorded at the beginning of
that reporting period.
3. Financial derivatives
In accordance with Israeli GAAP:
The Company applies FAS 52, FAS 80 and EITF 90-17 to account for
derivatives. Accordingly, the gains and losses on derivative
instruments held for hedging purposes are recognized in the statement
of income concurrently with gains or losses on the hedged assets.
Certain derivative financial instruments, which are not intended for
hedging purposes are presented in the balance sheet at their fair
value. Changes in fair value are included in the statement of income in
the period in which they occur.
In accordance with US GAAP:
All derivative instruments are recognized as either assets or
liabilities in the balance sheet and are measured at fair value.
Changes in the fair values of derivative instruments are recognized
currently in earnings since the specific hedge accounting criteria are
not met.
4. Goodwill
In accordance with Israeli GAAP:
Goodwill is amortized over its economic life but not more than 20
years. Goodwill is examined for a decrease in value where there are
indications that there has been a permanent decrease in the value of
the goodwill.
In accordance with US GAAP:
Goodwill is not amortized but is examined by means of an impairment
test carried out at least once a year on a fixed date in accordance
with the directives in FAS 142.
F-227
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A Material Differences between Israeli GAAP and US GAAP (cont'd)
4. Goodwill (cont'd)
In accordance with US GAAP: (cont'd)
A two-step impairment test is used to identify potential goodwill
impairment and measure the amount of a goodwill impairment loss to be
recognized (if any). The first step of the goodwill impairment test,
used to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the
carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test shall be performed to measure the
amount of impairment loss, if any.
The second step of the goodwill impairment test, used to measure the
amount of impairment loss, compares the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. If the
carrying amount of reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss shall be recognized in an
amount equal to the excess.
5. Stock options issued by investee companies
In accordance with Israeli GAAP:
The Investor is required to create a provision for losses, which it may
incur from the dilution of its holdings in investee companies, when it
is probable that the securities will be converted.
In accordance with US GAAP:
A loss of the parent company resulting from the dilution of its
holdings, because of securities being converted is recorded only at the
time of the conversion.
6. Capitalization of licensing costs
In accordance with Israeli GAAP:
Certain costs incurred by the Company in connection with the
registration process to obtain licenses to sell products in various
jurisdictions are capitalized. In addition, amounts which are paid by
the Company to the original registrant as data compensation costs only
after the EPA issues a registration to the Company are also
capitalized. The capitalized licensing costs are amortized over the
expected benefit period.
In accordance with U.S. GAAP:
The costs incurred by the Company in connection with the registration
process to obtain licenses to sell products in various jurisdictions
are deemed development costs under U.S. GAAP and are expensed as
incurred.
The amounts paid by the Company to the original registrant as data
compensation costs only after the EPA issues a registration to the
Company are capitalized and amortized over the expected benefit period.
F-228
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
7. Dividend Declared after the Balance Sheet Date
In accordance with Israeli GAAP:
Dividends declared subsequent to the balance sheet date are reflected
as a reduction of retained earnings.
In accordance with US GAAP:
Dividends declared subsequent to the balance sheet date are deducted
from retained earnings in the period in which the dividend was
declared.
8. Liabilities for employee severance benefits
In accordance with Israeli GAAP:
Amounts funded by purchase of insurance policies and by deposits with
recognized severance pay funds are deducted from the related severance
pay liability, which is then presented at a net amount.
In accordance with US GAAP:
The amounts funded are presented as other long-term assets and the
amount of the liability is presented under long-term liabilities.
9. Convertible debentures
In accordance with Israeli GAAP:
If a conversion of the debentures is expected, the debentures are
presented in the balance sheet in a separate category between
"long-term liabilities" and "shareholders' equity", whereas, if the
conversion of the debentures is not expected they are presented in the
balance sheet as part of "long-term liabilities".
In accordance with US GAAP:
All convertible debentures are presented in the balance sheet as part
of "long-term liabilities".
10. Contingent consideration
In accordance with Israeli GAAP:
Contingent consideration in respect of acquisition of interests in
investee companies is recorded as part as the purchase cost when it is
expected to be paid.
In accordance with US GAAP:
Contingent consideration is recorded as part of the purchase cost only
when the payment probability is beyond any reasonable doubt, which
generally is the date that the contingency is resolved.
F-229
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
11. Earnings per share
In accordance with Israeli GAAP:
In accordance with Opinion No. 55 of the Institute of Certified Public
Accountants in Israel, the dilutive effect of share options and
convertible debentures is included in the computation of basic earnings
per share only if their exercise or conversion is considered to be
probable. Calculation of the probability is based on the ratio between
the market price of the shares and the present value of the price of
exercising the stock options into shares or the present value of the
payments for conversion of the debentures into shares.
In accordance with US GAAP:
In accordance with FAS 128 "earnings per share" - basic earnings per
share are computed on the basis of the weighted average number of
shares outstanding during the year. Diluted earnings per share are
computed on the basis of the weighted-average number of shares
outstanding during the year, plus the potential dilutive effect of
ordinary share options and other potentially dilutive securities
considered to be outstanding during the year using the treasury stock
method.
12. Comprehensive income
In accordance with Israeli GAAP:
Presentation of comprehensive income and other comprehensive income is
not required.
In accordance with US GAAP:
An enterprise (a) classifies items of other comprehensive income by
their nature in the financial statements and (b) presents the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of the balance sheet.
13. Purchase of minority shares of Agan
In accordance with Israeli GAAP:
The purchase of minority shares of Agan in May 1998 (Note 1B) was
accounted according to recorded amounts.
In accordance with US GAAP:
Under FTB 85-5 the purchase of the minority shares was accounted at
fair value.
F-230
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
14. Statements of cash flows
(a) Translation differences in respect of cash and cash equivalents
In accordance with Israeli GAAP:
The statements shall report the effect of exchange rate changes
on cash and cash equivalents balances held in foreign
currencies, only in "autonomous foreign entities" in a separate
part of the reconciliation of the change in cash and cash
equivalents during the period.
In accordance with US GAAP:
The statements shall report the effect of exchange rate changes
on all cash and cash equivalents balances held in foreign
currencies as a separate part of the reconciliation of the
change in cash and cash equivalents during the period.
(b) Securitization transaction (see Note 3)
In accordance with Israeli GAAP:
The securitization transaction was classified as a sale of trade
receivables. Thus, cash flows, derived from that transaction,
were classified as cash flows from operating activities.
In accordance with US GAAP:
Until June 30, 2003 the securitization transaction did not meet
the criteria set out by FAS 140 for the classification as a sale
of trade receivables and was classified as a secured borrowing.
Therefore, cash flows derived from this transaction until June
30, 2003 were classified as cash flows from financing
activities.
F-231
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements
1. Statements of income:
a) Net income:
Year ended December 31
---------------------------------------------------
2005 2004 2003
------------ -------------- -------------
US$ thousands
---------------------------------------------------
Net income as reported, according to
Israeli GAAP 205,493 165,527 102,774
Deferred taxes (A1) 595 (15,861) (21,171)
Share-based payments to employees (A2) (12,213) (26,185) (28,004)
Financial derivatives (A3) 19,530 (10,374) (2,030)
Amortization of goodwill (A4) 9,149 10,569 5,277
Provision for loss in respect of convertible
securities in investee companies (A5) 55 1,760 330
Capitalization of licensing costs (A6) 2,241 (5,325) (3,835)
Cancallation of cumulative effect of
change in accounting method (A1) 2,025 - -
Other (223) - -
------------ -------------- -------------
226,652 120,111 53,341
Income tax in respect of the above differences (1,300) 3,736 2,790
Minority interest in respect of the
above differences 748 (109) (60)
------------ -------------- -------------
Net income according to US GAAP 226,100 123,738 56,071
============ ============== =============
b) Earnings per ordinary share
Basic earnings per ordinary share:
As reported according to Israeli GAAP 0.44 0.39 0.26
============ ============== =============
As reported according to US GAAP 0.54 0.32 0.15
============ ============== =============
Weighted average of number of shares and
share equivalents according to US GAAP 421,879 383,907 363,308
============ ============== =============
Fully diluted earnings per ordinary share:
As reported according to Israeli GAAP 0.44 0.37 0.25
============ ============== =============
As reported according to US GAAP 0.51 0.28 0.14
============ ============== =============
Weighted average of number of shares and
equivalents according to US GAAP 441,983 446,098 401,109
============ ============== =============
F-232
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements (cont'd)
2. Balance sheet:
December 31, 2005 December 31, 2004
------------------------------------------- -------------------------------------------
As reported Adjustments US GAAP As reported Adjustments US GAAP
----------- ----------- ----------- ----------- ----------- -----------
US$ thousands US$ thousands
------------------------------------------- -------------------------------------------
Other receivables(1)(5) 86,414 18,659 105,073 77,219 5,323 82,542
Long-term
investments, loans
and receivables (4) 22,684 15,758 38,442 22,070 15,957 38,027
Intangible assets
after 535,054 39,337 574,391 527,420 26,161 553,581
amortization(2)(3)(6)(10)
Other payables(3)(5)(8) 197,173 2,718 199,891 192,405 14,685 207,090
Deferred taxes, net(1) 59,801 20,526 80,327 54,354 8,674 63,028
Employee severance
benefits, net(4) 28,014 16,198 44,212 26,709 15,957 42,666
Minority interest(7)(12) 28,586 (2,256) 26,330 18,756 (1,981) 16,775
Capital reserve(8)(9)(10) (3,715) 134,848 131,133 (2,568) 128,993 126,425
Proposed dividend
subsequent to balance
sheet date(11) 23,500 (23,500) - 12,700 (12,700) -
Retained earnings((1)2) 481,029 (74,780) 406,249 345,841 (106,187) 239,654
Shareholders' equity 1,135,097 36,568 1,171,665 874,495 10,106 884,601
(1) Change in deferred taxes.
(2) Reversal of systematic amortization related to goodwill.
(3) Reconciliation of additional goodwill related to contingent consideration.
(4) Reconciliation of deposits funded in respect of severance pay.
(5) Recognition of all derivatives at fair value.
(6) Capitalization of licensing costs.
(7) Elimination of provisions for potential losses resulting from dilution of
holding in investee companies.
(8) Share options issued to employees.
(9) Cumulative foreign currency translation adjustments with respect to GAAP
differences.
(10) Purchase of minority shares of Agan.
(11) Dividend declared subsequent to balance sheet date.
(12) Effects of the reconciliation to US GAAP.
F-233
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements (cont'd)
3. Comprehensive income
Comprehensive income includes two components - net income and other
comprehensive income. Net income is the earning stated in the statement
of operations and other comprehensive income include amounts recorded
directly to shareholders' equity that do not derive from transactions
with shareholders or from distribution of income to shareholders.
Year ended December 31
---------------------------------------------------
2005 2004 2003
------------ -------------- -------------
US$ thousands
---------------------------------------------------
Net income according to US GAAP 226,100 123,738 56,071
Other comprehensive income, net of nil tax:
Adjustments from translation of financial statements
of investee companies (2,701) 2,825 1,886
------------ -------------- -------------
Total comprehensive income 223,399 126,563 57,957
============ ============== =============
4. Statement of cash flows:
Year ended December 31
---------------------------------------------------
2005 2004 2003
------------ -------------- -------------
US$ thousands
---------------------------------------------------
Net cash flows generated by operating activities:
According to Israeli GAAP 183,158 215,653 249,240
Effect of change in exchange rate on cash
(A14a) 3,091 (1,997) (5,434)
Classification of securitization transaction
(A14b) - - (48,226)
------------ -------------- -------------
According to US GAAP 186,249 213,656 195,580
============ ============== =============
Net cash flows generated by financing activities:
According to Israeli GAAP (55,559) (82,033) (155,926)
Classification of securitization transaction
(A14b) - - 48,226
------------ -------------- -------------
According to US GAAP (55,559) (82,033) (107,700)
============ ============== =============
F-234
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements (cont'd)
4. Statement of cash flows: (cont'd)
Translation differences in respect of cash balances of autonomous
foreign investee companies:
Year ended December 31
---------------------------------------------------
2005 2004 2003
------------ -------------- -------------
US$ thousands
---------------------------------------------------
Translation differences in respect of cash balances:
According to Israeli GAAP - - -
Effect of change in exchange rate on cash
(A14a) (3,091) 1,997 5,434
------------ -------------- -------------
According to US GAAP (3,091) 1,997 5,434
============ ============== =============
F-235
Makhteshim-Agan Industries Ltd.
Appendix to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
Rate of Control and Ownership in Subsidiaries as at December 31, 2005
A. Domestic consolidated subsidiaries
Control and
ownership
of holding
Holding company Investee company company
--------------- ---------------- -------------
%
-------------
Makhteshim-Agan Industries Ltd. Makhteshim Chemical Works Ltd. (Makhteshim) 100
Agan Chemical Manufacturers Ltd. (Agan) 100
Lycored - Natural Products Industries Ltd. (Lycored) 98
Luxembourg Medicine Ltd. 100
Makhteshim Prisma Industries Ltd. 100
Negev Peroxide - Registered Partnership 100
Agan Agan Aroma Chemicals Ltd. 100
Agan Chemical Marketing Ltd. 100
Lycored Bio-Dar Ltd. 100
Dalidar Pharma Israel (1995) Ltd. 100
Luxembourg Medicine Ltd. Isramedcom Ltd 100
Luxvision Ltd. (formerly Curex Ltd.) 100
B. Foreign consolidated subsidiaries
Makhteshim Celsius Property B.V. (Celsius) 100
Agan Fahrenheit Holding B.V. (Fahrenheit) 100
Lycored Nutriblend International Sarl 100
ALB Holdings UK 100
ALB Holdings UK Nutriblend Ltd. 100
Makhteshim and Agan in equal parts Makhteshim Agan Holding B.V. 100
Celsius Irvita Plant Protection N.V. 100
Irvita Plant Protection N.V. White Rock Insurance Company PCC Limited/Macell 100
Fahrenheit Quena Plant Protection N.V. 100
Celsius and Fahrenheit in equal parts Magan HB B.V. 100
Aragonesas Agro S.A. 100
Magan Argentina S.A. 100
Makhteshim Agan Hungaria K.F.T 100
Proficol S.A. 57.5
Proficol Andina N.V. 57.5
Magan HB B.V. MAB Participacoes S/C Ltd. 100
MAB Participacoes S/C Ltd. Milenia Participacoes S.A 100
Milenia Participacoes S.A. Milenia Paraguay S.A. 100
Emerald Agrochemical Company AVV 100
Milenia Biotechnologia e Genetica Ltd. 55
Milenia Agro Ciencias S.A. 100
Defensa S.R.L. 100
F-236
Makhteshim-Agan Industries Ltd.
Appendix to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
B. Foreign consolidated subsidiaries (Cont'd)
Control and
ownership
of holding
Holding company Investee company company
--------------- ---------------- -------------
%
-------------
Makhteshim Agan Hungrria K.F.T Biomark Trading House K.f.t 70
Proficol S.A. Proficol Venezuela S.A. 100
Proficol Andina N.V. Rice Co. LLC (USA) 50.1
Makhteshim Agan Holding B.V Makhteshim Agan Costa Rica S.A. 100
Makhteshim Agan Espana S.A. 100
Makhteshim Agan of North America Inc. 100
Makhteshim Agan France S.A.R.L. 100
Makhteshim Agan (UK) Ltd. 100
Makhteshim Agan Romania S.R.L. 100
Makhteshim Agan (Thailand) Ltd. 100
Agricur Defensivos Agricolas Ltd. 100
Makhteshim Agan Italia S.R.L. 95
Makhteshim Agan South Africa PTY Ltd. 100
Magan Korea Co. Ltd. 100
Makhteshim Agan India Private Ltd. 100
Makhteshim Agan Poland SP. zo.o 100
Magan Holding Germany GmbH 100
Makhteshim Agan Sweden AB 100
Makhteshim Agan Portugal Ltd. 100
Magan Japan Co. Ltd. 100
Magan Italia S.R.L 100
MA U.S. Holding Inc. (USA) 100
Agronica Australasia Pty Limited Australia 100
Makhteshim Agan Benalux and Nordik B.V. 49
Magan Holding Germany GmbH Feinchemie Schwebda GmbH 100
Makhteshim Agan Deutschland GmbH 100
Feinchemi Schwebdan GmbH FCS France S.A 100
Feinchemi (UK) Ltd. 100
MA U.S. Holding Inc. (USA) Farm Saver Group 100
Control Solutions Inc. 60
Agronica Australasia Pty
Limited Australia Farmoz Pty Limited 100
C. Companies Proportionately Consolidated
Makhteshim Agan Industries Biotec M.A.H. Management Ltd 50
Biotec M.A.H. - Registered Partnership 50
Biotec M.A.H -
Registered Partnership Biotec Agro Ltd. 100
Makhteshim Agan Holdings B.V. Alfa Agricultural Supplies S.A. 49
Fahrenheit InnovAroma S.A. 50
D. Affiliated companies
Makhteshim Fibertec Fiberglass Ltd. 45.5
Makhteshim and Agan hold shares in other foreign companies which retain
registration rights to certain products sold outside of Israel.
F-237
ECI Telecom Ltd. and Subsidiaries
Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Contents
Page
Report of Independent Registered Public Accounting Firm F-239
Consolidated Balance Sheets as of
December 31, 2005 and 2004 F-240
Consolidated Statements of Operations for the Years
ended December 31, 2005, 2004 and 2003 F-242
Consolidated Statements of Comprehensive Income (Loss) for the
Years ended December 31, 2005, 2004 and 2003 F-243
Consolidated Statements of Changes in Shareholders' Equity
for the Years ended December 31, 2005, 2004 and 2003 F-244
Consolidated Statements of Cash Flows for the
Years ended December 31, 2005, 2004 and 2003 F-246
Notes to the Consolidated Financial Statements F-249
F-238
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
ECI Telecom Ltd.
We have audited the accompanying consolidated balance sheets of ECI Telecom Ltd.
and its subsidiaries ("the Company") as of December 31, 2005 and 2004, and the
related consolidated statements of operations, comprehensive income (loss),
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's Board of Directors and its
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International
Tel-Aviv, Israel
March 9, 2006
F-239
Consolidated Balance Sheets as of December 31
-----------------------------------------------------------------------------------------------------
2005 2004
Note $ in thousands $ in thousands
-------- -------------- --------------
Assets
Current assets
Cash and cash equivalents 17A 63,828 74,182
Short-term investments 2,17B 41,304 24,714
Receivables:
Trade, net 17C 152,805 142,928
Other 17D 24,751 23,441
Prepaid expenses 3,617 5,982
Work in progress 2,937 3,244
Inventories 3 146,963 175,065
-------------- --------------
Total current assets 436,205 449,556
-------------- --------------
Long-term receivables, net 4 8,273 89,975
-------------- --------------
Long-term deposits and marketable securities 2 139,964 119,359
-------------- --------------
Assets held for severance benefits 10 25,931 25,182
-------------- --------------
Investments 5 19,787 26,766
-------------- --------------
Property, plant and equipment 6
Cost 265,446 259,318
Less - accumulated depreciation 145,855 139,965
-------------- --------------
119,591 119,353
-------------- --------------
Software development costs, net 7 11,999 14,435
-------------- --------------
Goodwill, 8 39,329 1,039
-------------- --------------
Other assets, net 9 47,656 9,144
-------------- --------------
Total assets 848,735 854,809
============== ==============
/s/ Shlomo Dovrat /s/ Rafi Maor
--------------------------------- -----------------------------------
Shlomo Dovrat Rafi Maor
Chairman of the Board President, Chief Executive Officer
March 9, 2006
F-240
ECI Telecom Ltd. and Subsidiaries
-----------------------------------------------------------------------------------------------------
2005 2004
Note $ in thousands $ in thousands
-------- -------------- --------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debts 17E - 30,000
Trade payables 56,451 68,364
Other payables and accrued liabilities 17F 120,538 149,648
-------------- --------------
Total current liabilities 176,989 248,012
-------------- --------------
Long-term liabilities
Other liabilities 157 -
Liability for employee severance benefits 10 48,340 50,943
-------------- --------------
Total long-term liabilities 48,497 50,943
-------------- --------------
Total liabilities 225,486 298,955
-------------- --------------
Minority interest 4,120 4,086
-------------- --------------
Commitments and contingencies 11
Shareholders' equity 12
Ordinary shares NIS 0.12 par value per share, authorized
200,000,000 shares; Issued and outstanding 111,827,822
shares as of December 31, 2005 and 109,391,828 shares
as of December 31, 2004 6,262 6,198
Capital surplus 648,532 642,222
Accumulated other comprehensive income (loss) 8,486 (12,637)
Accumulated deficit (44,151) (84,015)
-------------- --------------
Total shareholders' equity 619,129 551,768
-------------- --------------
Total liabilities and shareholders' equity 848,735 854,809
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
F-241
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Operations for the Year Ended December 31
----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
---------- ---------- ----------
Note $ in thousands, except per share amounts
--------- ---------------------------------------------
Revenues 17G 629,918 496,712 392,567
Cost of revenues 17H 367,779 300,971 239,298
---------- ---------- ----------
Gross profit 262,139 195,741 153,269
Research and development costs, net 17I 87,289 64,870 62,041
Selling and marketing expenses 17J 95,826 78,423 73,643
General and administrative expenses 17K 41,976 35,491 38,956
Recovery of doubtful debt 4C(5) (10,356) - -
Amortization of acquisition-related intangible assets 2,902 - 1,773
Impairment of assets 21 - - 667
Impairment of loans 21 3,000 - -
Acquired in-process research and development 19B 890 - -
Restructuring expenses 20 - 2,585 8,394
---------- ---------- ----------
Operating income (loss) 40,612 14,372 (32,205)
Financial expenses 17L (3,656) (6,562) (8,645)
Financial income 17L 8,857 9,169 7,902
Other income (expenses), net 17M 1,917 2,693 (5,376)
---------- ---------- ----------
Income (loss) from continuing operations
before company's equity in results of investee
companies, minority interest and taxes on income 47,730 19,672 (38,324)
Taxes on income 15 (3,454) (1,924) (2,141)
---------- ---------- ----------
Income (loss) from continuing operations before
company's equity in results of investee companies
and minority interest 44,276 17,748 (40,465)
Company's equity in results of investee
companies (4,285) (3,387) (4,334)
Minority interest (127) (305) 76
---------- ---------- ----------
Income (loss) from continuing operations 39,864 14,056 (44,723)
Loss on discontinued operations, net of income tax
(tax benefit) of ($55
thousand) and $38 thousand
for the years ended December 31,
2004 and 2003, respectively 22 - (3,903) (26,317)
---------- ---------- ----------
Net income (loss) 39,864 10,153 (71,040)
========== ========== ==========
Earnings (loss) per ordinary share 17O
Basic earnings (loss) per ordinary share:
Continuing operations 0.36 0.13 (0.41)
Discontinued operations - (0.04) (0.24)
---------- ---------- ----------
Net earnings (loss) per ordinary share 0.36 0.09 (0.65)
========== ========== ==========
Diluted earnings (loss) per ordinary share:
Continuing operations 0.34 0.12 (0.41)
Discontinued operations - (0.03) (0.24)
---------- ---------- ----------
Net earnings (loss) per ordinary share 0.34 0.09 (0.65)
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
F-242
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Operations for the Year Ended December 31
----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Net income (loss) 39,864 10,153 (71,040)
Other comprehensive income (loss):
Changes in fair value of financial instruments, net of taxes (nil) 19,226 (8,303) (4,843)
Realization of gain on available for sale securities, net of taxes (nil) - (1,282) -
Unrealized holding gains on available for sale
securities arising during the year, net of taxes (nil) 1,897 2,341 1,282
-------------- -------------- --------------
Total other comprehensive income (loss) 21,123 (7,244) (3,561)
-------------- -------------- --------------
Comprehensive income (loss) 60,987 2,909 (74,601)
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
F-243
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------------------
Number Share Capital Accumulated Accumulated Total
of shares(1) capital surplus other earnings shareholders'
comprehensive (deficit) equity
income (loss) (Note 15A2)
------------- --------- ----------- ------------- ------------ -------------
Balance at January 1, 2003 107,512,612 6,152 658,425 (1,832) (23,128) 639,617
Changes during 2003 -
Net loss for the year
ended December 31, 2003 - - - - (71,040) (71,040)
Share issuance to employees 424,633 8 647 - - 655
Employees stock options
exercised and paid 100,818 3 263 - - 266
Amortization of deferred
compensation expenses - - 3,568 - - 3,568
Net unrealized gain on available
for sale securities - - - 1,282 - 1,282
Changes in fair value of
financial instruments - - - (4,843) - (4,843)
------------- --------- ----------- ------------- ------------ -------------
Balance at December 31, 2003 108,038,063 6,163 662,903 (5,393) (94,168) 569,505
Changes during 2004 -
Net income for the year
ended December 31, 2004 - - - - 10,153 10,153
Employees stock options
exercised and paid 1,353,765 35 2,445 - - 2,480
Amortization of deferred
compensation expenses - - 1,650 - - 1,650
Net unrealized gain on
available for sale securities - - - 2,341 - 2,341
Realization of gain on
available for sale securities - - - (1,282) - (1,282)
Changes in fair value of
financial instruments - - - (8,303) - (8,303)
Distribution of shares of a
subsidiary as dividend in kind
(see Note 1A(4)) - - (24,776) - - (24,776)
------------- --------- ----------- ------------- ------------ -------------
Balance at December 31, 2004 109,391,828 6,198 642,222 (12,637) (84,015) 551,768
============= ========= ========== ============= ============ =============
(1) Issued and outstanding
The accompanying notes are an integral part of the consolidated financial statements.
F-244
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (cont'd)
---------------------------------------------------------------------------------------------------------------------------------
Number Share Capital Accumulated Accumulated Total
of shares(1) capital surplus other earnings shareholders'
comprehensive (deficit) equity
income (loss) (Note 15A2)
------------- --------- ----------- ------------- ------------ -------------
Balance at January 1, 2005 109,391,828 6,198 642,222 (12,637) (84,015) 551,768
Changes during 2005 -
Net income for the year
ended December 31, 2005 - - - - 39,864 39,864
Employees stock options
exercised and paid 1,697,867 45 4,254 - - 4,299
Restricted shares issuance 742,776 19 (19) -
Restricted shares forfeited (9,557) - - - - -
Share issuance 4,908 - 35 - - 35
Amortization of deferred
compensation expenses - - 2,040 - - 2,040
Net unrealized gain on
available for sale securities - - - 1,897 - 1,897
Changes in fair value of
financial instruments - - - 19,226 - 19,226
------------- --------- ----------- ------------- ------------ -------------
Balance at December 31, 2005 111,827,822 6,262 648,532 8,486 (44,151) 619,129
============= ========= ========== ============= ============ =============
(1) Issued and outstanding
The accompanying notes are an integral part of the consolidated financial statements.
F-245
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
* Revised
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Cash flows from operating activities
Net income (loss) 39,864 10,153 (71,040)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 36,665 35,827 41,622
Amortization of share based compensation 2,040 1,650 3,568
Loss (gain) on sale of property and equipment (2,398) (716) 1,362
Impairment of assets - - 6,686
Impairment of loans 3,000 - -
Capital losses (gains), net (2,096) 6,419 4,862
Gain from sale of operation - (24,186) -
Acquired In-process research and development costs 890 - -
Other - net 1,723 (468) 7,066
Company's equity in results of investee companies 4,285 3,387 4,334
Minority interest 127 562 (16,956)
Loss (gain) from marketable securities 1,648 (1,482) (111)
Decrease in trade receivables (including
non-current maturities of trade receivables) 78,056 19,395 69,069
Decrease (increase) in other receivables 3,565 (6,196) 9,531
Decrease (increase) in prepaid expenses 3,325 (947) (1,410)
Decrease in work in progress 308 7,254 3,192
Decrease (increase) in inventories 38,127 (57,010) 24,149
Increase (decrease) in trade payables (16,759) 13,986 14,413
Increase (decrease) in other payables and accrued liabilities (16,068) 32,706 (23,500)
Decrease in other long-term liabilities - (5,015) (2,364)
Decrease in liability for employee severance benefits (2,602) (779) -
-------------- -------------- --------------
Net cash provided by operating activities 173,700 34,540 74,473
-------------- -------------- --------------
The accompanying notes are an integral part of the consolidated financial statements.
F-246
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
* Revised
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Cash flows used in investing activities
Investments in deposits, net 2,368 4,454 (22,563)
Software development costs capitalized (8,014) (11,151) (11,364)
Investment in property, plant and equipment (21,499) (24,293) (11,347)
Proceeds from sale of property, plant and equipment 7,131 1,487 878
Purchase of technology - - (869)
Acquisition of investee companies (559) (1,212) (203)
Long-terms loans granted - (6,000) -
Proceeds from realization of an investee company 2,350 - -
Investment in marketable securities (37,838) (41,382) (80,317)
Changes in assets held for severance benefits (1,006) (751) 537
Repayment of convertible notes - 5,400 -
Acquisition of operations (A) (13,605) - -
Acquisition of newly consolidated subsidiary (B) (85,923) - -
Proceed from realization of consolidated subsidiary and operations - 35,000 9,100
-------------- -------------- --------------
Net cash used for investing activities (156,595) (38,448) (116,148)
-------------- -------------- --------------
Cash flows used in financing activities
Repayment of loans from banks (30,000) (30,000) (100,000)
Decrease in short-term credit, net - - (70,012)
Share issuance 35 - -
Exercise of stock options 4,299 2,480 921
Disposition of a consolidated subsidiary as dividend in kind - (39,981) -
-------------- -------------- --------------
Net cash used in financing activities (25,666) (67,501) (169,091)
-------------- -------------- --------------
Effect of change in exchange rate on cash (1,793) 216 (508)
-------------- -------------- --------------
Net decrease in cash and cash equivalents (10,354) (71,193) (211,274)
-------------- -------------- --------------
Cash and cash equivalents at beginning of year 74,182 **145,375 356,649
-------------- -------------- --------------
Cash and cash equivalents at end of year 63,828 74,182 ** 145,375
============== ============== ==============
Supplemental disclosures:
Income taxes paid, net of tax refunds 2,897 282 7,158
============== ============== ==============
Interest paid 154 1,518 2,479
============== ============== ==============
* The consolidated cash flow statement for the year ended December 31, 2004 has been revised to
combine cash flows from discontinued operations with cash flows from continuing operations
within each category (previously, all cash flows from discontinued operations were presented,
net in one line, within the operating cash flows category).
** Include $ 18,964 thousand related to discontinued operations.
The accompanying notes are an integral part of the consolidated financial statements.
F-247
ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
A. Acquisition of operations (see Note 19)
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Net current assets 5,216 - -
Liability for unpaid consideration (250) - -
Property, plant and equipment 580 - -
Core Technology 4,349 - -
Goodwill 1,230 - -
Other intangible assets 2,480 - -
-------------- -------------- --------------
13,605 - -
============== ============== ==============
B. Acquisition of newly consolidated subsidiary (see Note 19)
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Net current assets (other than cash) 11,055 - -
Property, plant and equipment 3,155 - -
Long-term liabilities (157) - -
Core Technology 33,820 - -
In-process research and development 890 - -
Backlog 100 - -
Goodwill 37,060 - -
-------------- -------------- --------------
85,923 - -
============== ============== ==============
C. Non-cash activities
Purchase of fixed assets 3,049 - -
-------------- -------------- --------------
Sale of fixed assets in return for shares in investee company - - 1,053
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
F-248
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies
Significant accounting policies, applied on a consistent basis are as
follows:
A. General
1. ECI Telecom Ltd. (an Israeli corporation) and subsidiaries
("ECI" or the "Company") provide network and access solutions
for digital telecommunications networks. ECI designs,
develops, manufactures, markets and supports digital
telecommunications solutions for evolving services, including
voice, data, video and multimedia, and for building next
generation converging networks. ECI's products and platforms
are designed to create and manage bandwidth, maximize revenues
for network operators, reduce operating expenses, expand
capacity, improve performance and enable new revenue-producing
services.
The Company focuses its activities on three core businesses,
which are organized in three divisions: Broadband Access
Division (formerly - Inovia), Optical Networks Division
(formerly - Lightscape and Enavis) and Data Networking
Division (formerly - Laurel Networks). (For segment reporting,
see Note 17G).
2. In December 2002, the Company transferred part of the NGTS
activities to a new company subsequently called Veraz Networks
Inc., which was set up with third parties and in which the
Company holds approximately 41.5 % of the share capital (33 %
on a fully diluted basis).
3. In April 2003, the Company sold the activities of InnoWave.
Accordingly, the results of InnoWave for all periods reported
were reclassified as discontinued operation and presented as a
single-line item, net of income tax in the statement of
operations following the results from continuing operations
(see Note 22B).
4. On March 9, 2004, the Board of Directors of ECI decided, in
principle, that ECI would distribute 7.6 million of its shares
in ECtel Ltd. ("ECtel") to ECI's shareholders.
On April 28, 2004, after the Company obtained court approval
and the consent of its banks, the Board of Directors declared
a distribution of 7.6 million shares of ECtel to the Company's
shareholders of record on May 5, 2004. The shares were
distributed on May 10, 2004. Before distribution, ECI held
approximately 10.5 million, or 58%, of ECtel's shares. After
distribution of the shares, ECI holds approximately 16% of
ECtel's outstanding shares that are presented in the
consolidated balance sheet as an available for sale
securities. (see Note 1D).
Accordingly, the results of ECtel for all periods reported
were reclassified as discontinued operations and presented as
a single-line item, net of income tax in the statement of
operations following the results from continuing operations
(see Note 22B).
5. On June 3, 2005, the Company acquired 100% of the outstanding
common shares of Laurel Networks, Inc. ("Laurel Networks") The
results of Laurel Networks' operations have been included in
the consolidated financial statements since that date. Laurel
Networks is a provider of Next-Generation IP/MPLS Multi
Service Edge Routers. After the transaction Laurel Networks
became the Data Networking Division of ECI (see Note 19B).
F-249
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
A. General (cont'd)
6. The financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) in the United
States of America.
7. The currency of the primary economic environment in which the
operations of the Company and its subsidiaries are conducted
is the U.S. dollar ("dollar").
Most of the Company's sales are made outside of Israel, in
dollars and other non-Israeli currencies (see Note 17G as to
geographical distribution). Most purchases of materials and
components, as well as most selling and other expenses
incurred outside Israel, are in dollars. In view of the
foregoing, the dollar has been determined to be the Company's
functional currency.
Transactions and balances denominated in dollars are presented
at their original amounts. Non-dollar transactions and
balances have been remeasured into dollars in accordance with
the principles set forth in Statement of Financial Accounting
Standards ("SFAS") No. 52 "Foreign Currency Translation" of
the Financial Accounting Standards Board (FASB).
All exchange gains and losses from remeasurement of monetary
balance sheet items denominated in non-dollar currencies are
reflected in the consolidated statement of operations when
they arise. Such foreign exchange gains and losses are
included in the same statement of operations items as those in
which the related transactions are included.
8. The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. These are management's best estimates based
on experience and other relevant data, however, actual results
could differ from these estimates.
B. Principles of consolidation
The consolidated financial statements include those of the Company and
all of its subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation.
C. Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase, to be cash equivalents
(except for held to maturity debt investments).
F-250
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
D. Investments
1. Investee companies
Investments in investee companies, in which the Company has
significant influence (affiliated companies) are presented
under the equity method, that is, at cost plus the Company's
share of the post-acquisition income or losses.
Investment in entities in which the Company does not have
significant influence ("other companies"), are stated as
follows:
- Marketable securities - as stated in 2 below.
- Non-marketable securities - at cost, less any decline
in value which is other than temporary.
2. Marketable securities
The Company classifies its debt securities in one of three
categories: Trading, available for sale or held to maturity
and its equity securities as trading or available for sale.
Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity
debt securities are those securities in which the Company has
the ability and intent to hold the security until maturity.
All debt securities not included in trading or held to
maturity are classified as available for sale.
Trading, and available-for-sale securities are recorded at
fair value. Held-to-maturity debt securities are recorded at
amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a
separate component of other comprehensive income until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a
specific-identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost, that is deemed to be
other than temporary, is recognized as a reduction in carrying
amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life
of the related held-to-maturity or available-for-sale security
as an adjustment to yield, using the effective-interest
method. Dividend and interest income are recognized when
earned.
E. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on the moving average basis.
F-251
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
F. Property, plant and equipment
1. Assets are stated at cost, less accumulated depreciation.
2. Depreciation is computed using the straight-line method, over
the estimated useful economic life of the assets.
Annual rates of depreciation are as follows:
Buildings 2.5%
Machinery and equipment 10% - 33% (mainly 10%)
Information technology 20% - 33%
Office furniture and equipment 7% - 10%
Leasehold improvements are amortized by the straight-line
method over the lesser of the lease term or the estimated
useful economic life.
3. Major renewals and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
4. Upon the sale or retirement of equipment and leasehold
improvements, the cost and related accumulated depreciation
and amortization are eliminated from the respective accounts
and the resulting gain or loss is reflected in the
consolidated statements of operations.
G. Accrued warranty costs
Accrued warranty costs are calculated in respect of products sold and
work performed are recognized based on prior experience, and other
relevant factors, (See also Note 17F).
H. Allowance for doubtful debts
The financial statements include an allowance for loss from receivables
for which collection is in doubt. In determining the adequacy of the
allowance consideration is given the historical experience, aging of
the receivable and to information available about specific debtors,
including their financial situation, the volume of their operations,
and evaluation of the security received from them or their guarantors
(see also Note 17C).
I. Software development costs
The Company capitalizes certain software development costs in
accordance with SFAS No. 86 "Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed". Capitalization of software
development costs begins upon the determination of technological
feasibility as defined in the Statement and continues up to the time
the software is available for general release to customers, at which
time capitalized software costs are amortized to research and
development costs on a straight-line basis over the expected life of
the related product, generally one to two years. (for 2003 - generally
two to three years).
F-252
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
I. Software development costs (cont'd)
Software development costs include costs that relate principally to
projects which have recently been released or are not yet available for
release to customers. Management believes that future revenues related
to these projects will be sufficient to realize the amounts capitalized
at December 31, 2005, and as such these amounts will be recovered over
the lives of the related projects. It is possible, however, that those
estimates of future revenues could be adversely impacted if these
projects are not finally completed and released in the future or if
market acceptance of related technology is not as anticipated by
Management. As a result, the recovery of these capitalized software
development costs through future revenues could be reduced materially.
In such event, the related capitalized software development costs will
be written-off.
J. Business combinations
SFAS No. 141 "Business Combinations" requires that the purchase method
be used for all business combinations. Under the purchase method, the
cost of an acquisition is allocated to the assets acquired, including
identifiable intangible assets and liabilities assumed based on their
estimated fair values with the excess of total cost over such aggregate
fair value being recognized at goodwill.
K. Goodwill and other intangible assets
The Company follows SFAS No. 142 "Goodwill and Other Intangible
Assets", under to SFAS No. 142, goodwill and intangible assets that
have indefinite useful lives are not subject to amortization, but
instead tested at least annually for impairment. Intangible assets that
have finite useful lives are amortized over their expected useful
lives.
L. Revenue recognition
1. Revenues from products are recognized when the product has
been delivered and when title to the system and risk of loss
have been substantially transferred to the customer, provided
that collection is reasonably assured. When the sale
arrangement includes customer acceptance provisions with
respect to network interoperability, revenue is not recognized
before the Company has demonstrated that the criteria
specified in the acceptance provisions have been satisfied.
F-253
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
L. Revenue recognition (cont'd)
When a sale involves multiple elements, such as sales of
products that include installation and integration services,
the entire fee from the arrangement is evaluated under
Emerging Issues Task Force ("EITF") 00-21, "Revenue
Arrangements with Multiple Deliverables". In such
arrangements, the arrangement consideration is allocated to
each respective element based on its relative fair value and
recognized when all the following revenue recognition criteria
for each element are met: (1) the delivered items have value
to the customer on a standalone basis, (2) there is objective
and reliable evidence of the fair value of the undelivered
items, (3) if the arrangement includes a general right of
return, delivery or performance of the undelivered items is
probable and substantially in the control of the Company.
2. The Company makes certain sales through resellers. The Company
recognizes revenues from sales to resellers, assuming all
other criteria for revenue recognition are met and provided
that there is no contractual right of return, either (i) when
it receives adequate collateral (which in almost every case is
a Letter of Credit) from the reseller to secure payment to the
Company, or (ii) in certain instances where the Company has an
established ongoing relationship with the reseller and a
proven track record of payments, when it receives written
evidence of the identity of the end-user and the existence of
an agreement by the end-user to purchase the product from the
reseller (e.g. a copy of a purchase order) or (iii) in
instances where the reseller is a major internationally known
corporation and the Company has an established ongoing
relationship with such reseller and a proven track record of
payments, upon delivery of the products to the reseller. When
the collectability from the reseller is not reasonably assured
or when the right of return exists, revenue is recognized on a
cash basis, provided that the reseller has ultimately sold the
products to an end-user or the return privilege has
substantially expired.
3. Revenues from sales involving long-term credit arrangements at
less than accepted interest rates are recorded at the present
value of the related future cash flows. The difference between
the amounts receivable and their present value is recognized
as interest income over the period of the receivable by the
interest method.
4. Revenue from software license is generally recognized at the
time the software is delivered to the customer, if collection
is probable, the fee is fixed or determinable, the Company has
no significant obligations remaining under the sales or
licensing agreement and no significant customer acceptance
requirements exist subsequent to software delivery.
5. Service revenues from product maintenance contracts and
separately priced extended warranty contracts are generally
recognized ratably over the contract period, while revenue
from software services generally is recognized as the services
are performed or, if no pattern of performance is evident,
ratably over the period during which such services are
performed.
6. The percentage of completion method of accounting, in
accordance with Statement of Position ("SOP") 81-1 "Accounting
for Performance of Construction Type and Certain Production
Type Contracts" is used for sales generated from certain
contracts, primarily those related to customized network
solutions and network build-outs with durations of at least
six months. The units-of-delivery method or units-of-work
performed method is used to measure progress on each contract.
Revenue and cost estimates are revised periodically based on
changes in circumstances. Any expected losses on contracts are
recognized immediately upon contract signing or as soon
thereafter as identified.
F-254
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
M. Research and development
Research and development costs, net of any grants, are charged to the
consolidated statements of operations as incurred. Royalties paid and
accrued in respect of the said grants are classified as cost of
revenues.
N. Reclassification
Certain amounts in prior years' financial statements have been
reclassified to conform to the current year's presentation. (See also
Note 22).
O. Income taxes
1. The Company accounts for income taxes under SFAS No. 109
"Accounting for Income Taxes".
Under SFAS 109, deferred tax assets or liabilities are
recognized in respect of temporary differences between the tax
bases of assets and liabilities and their financial reporting
amounts, as well as in respect of tax losses and other
deductions which may be deductible for tax purposes in future
years, based on tax rates applicable to the periods in which
such deferred taxes are expected to be realized. Valuation
allowances are established when necessary to reduce deferred
tax assets to the amount considered more likely than not to be
realized. Deferred tax assets and liabilities are classified
as current or non current items in accordance with the nature
of the assets or liabilities to which they relate. When there
is no underlying assets or liabilities the deferred tax assets
and liabilities are classified in accordance with the period
of expected reversal.
Deferred taxes have not been recorded in respect of the
following matters -
o Certain undistributed earnings of foreign
consolidated subsidiaries which are taxable upon
distribution by way of dividend, as no such dividend
distribution intention exists.
o Differences between the financial carrying amounts of
non monetary assets and liabilities and their tax
basis attributable to the rate of change in Israeli
Consumer Price Index (which serves as a basis for
measurement for tax purposes) and the rate of change
in the NIS/US dollar exchange rate, in accordance
with paragraph 9 (f) of SFAS 109.
2. Income tax expense represents the tax payable for the period
and the change during the period in deferred tax assets and
liabilities.
F-255
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
P. Derivative financial instruments
SFAS No. 133, "Accounting for Derivative Instruments and Certain
Hedging Activities" and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activity, an Amendment of
SFAS 133" require that all derivative instruments be recorded on the
balance sheet at their respective fair values.
The Company has significant international sales transactions in foreign
currencies and has a policy of hedging forecasted and actual foreign
currency risk with forward foreign exchange contracts and foreign
exchange options. The Company's forward foreign exchange contracts are
primarily denominated in Euro, Pounds Sterling and NIS and are for
periods consistent with the terms of the underlying transactions,
generally one year or less. Derivative instruments are employed to
eliminate or minimize certain foreign currency exposures that can be
identified and quantified.
On the date a derivative contract is entered into, the Company
designates the derivative as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment
(fair value hedge), or a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge), or a foreign-currency
fair-value or cash-flow hedge (foreign currency hedge). For all hedging
relationships the Company formally documents the hedging relationship
and its risk-management objective and strategy for undertaking the
hedge, the hedging instrument, the hedge item, the nature of the risk
being hedged, how the hedging instrument's effectiveness in offsetting
the hedged risk will be assessed, and a description of the method of
measuring ineffectiveness. This process includes linking all
derivatives that are designated as fair-value, cash-flow, or
foreign-currency hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of the hedged items.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a fair-value hedge, along with the
loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk,
are recorded in operations. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income (loss) to
the extent that the derivative is effective as a hedge, until
operations are affected by the variability in cash flows of the
designated hedged item. Changes in the fair value of derivatives that
are highly effective as hedges and that are designated and qualify as
foreign-currency hedges are recorded in either operations or other
comprehensive income (loss), depending on whether the hedge transaction
is a fair-value hedge or a cash-flow hedge. The ineffective portion of
the change in fair value of a derivative instrument that qualifies as
either a fair-value hedge or a cash-flow hedge is reported in
operations. Changes in the fair value of derivative trading instruments
are reported in current period operations.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item, the
derivative expires or is sold, terminated, or exercised, or the
derivative is de-designated as a hedging instrument, because it is
unlikely that a forecasted transaction will occur, a hedged firm
commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a hedging
instrument is no longer appropriate.
F-256
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
P. Derivative financial instruments (cont'd)
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the
Company continues to carry the derivative on the balance sheet at its
fair value and no longer adjusts the hedged asset or liability for
changes in fair value. The adjustment of the carrying amount of the
hedged asset or liability is accounted for in the same manner as other
components of the carrying amount of that asset or liability. When
hedge accounting is discontinued because the hedged item no longer
meets the definition of a firm commitment, the Company continues to
carry the derivative on the balance sheet at its fair value, removes
any asset or liability that was recorded pursuant to recognition of the
firm commitment from the balance sheet, and recognizes any gain or loss
in operations. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the Company
continues to carry the derivative on the balance sheet at its fair
value with subsequent changes in fair value included in operations, and
gains and losses that were accumulated in other comprehensive income
are recognized immediately in operations. In all other situations in
which hedge accounting is discontinued, the Company continues to carry
the derivative at its fair value on the balance sheet and recognizes
any subsequent changes in its fair value in operations.
Q. Comprehensive income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income consists of net income (loss) and net
unrealized gains (losses) on available for sale securities and on the
change in the fair value of financial instruments that are used for
cash flow hedging, and is presented in the consolidated statement of
comprehensive income (loss).
R. Stock option and restricted shares plans
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations, including FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25" issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation cost is recognized only
if the market price of the underlying stock at the date of the grant
exceeds the exercise price. Any such cost so determined is allocated to
compensation expense over the vesting period of the award.
SFAS No. 123, "Accounting for Stock-Based Compensation", established
accounting and disclosure requirements using a fair value-based method
of accounting for stock-based employee compensation plans. As allowed
by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123. (See Note 12E and
18A).
F-257
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
R. Stock option and restricted shares plans (cont'd)
Had compensation expenses for stock options granted under the Company's
stock option plan been determined based on the fair value at the grant
dates consistent with the fair value accounting method of SFAS No. 123,
the Company's net income (loss) and net income (loss) per ordinary
share would have been as follows:
For the year ended December 31
-----------------------------------------------
2005 2004 2003
---------- ---------- ----------
$ in thousands, except per share amounts
-----------------------------------------------
Net income (loss), as reported 39,864 10,153 (71,040)
Add: Stock-based employee compensation
expenses included in reported net
income (loss), net of related tax effects (nil) 2,040 1,650 3,568
Deduct: Total stock-based employee compensation
expense determined under the fair value
method for all awards, net of
related tax effects (nil) (10,267) (10,072) (23,450)
---------- ---------- ----------
Pro Forma net income (loss) 31,637 1,731 (90,922)
========== =========== ==========
Basic earnings (loss) per ordinary share ($):
- as reported 0.36 0.09 (0.65)
- pro forma 0.29 0.02 (0.84)
Diluted earnings (loss) per ordinary share($):
- as reported 0.34 0.09 (0.65)
- pro forma 0.27 0.01 (0.84)
S. Acquired in-process research and development costs (IPR&D).
Acquired in-process research and development represents the value
assigned in a purchase business combination to research and development
projects of the acquired business that were commenced, but not yet
completed, at the date of acquisition, for which technological
feasibility has not been determined and which have no alternative
future use in research and development activities or otherwise. In
accordance with SFAS No. 2, "Accounting for Research and Development
Costs", as interpreted by FASB Interpretation No. 4 "Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the
Purchase Method" "amounts assigned to acquired in-process research and
development meeting the above criteria are charged to expense at the
date of consummation of the purchase business combination".
F-258
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
T. Impairment or disposal of long-lived assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future cash flows expected to be generated by the asset or
used in its disposal. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized. Assets
to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. SFAS No 144 requires companies to
separately report discontinued operations and extends that reporting to
a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held
for sale (See also Notes 21and 22).
U. Sale of financial assets
SFAS No. 140 - "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", requires that a transfer of
financial assets in which control is surrendered, is accounted for as a
sale to the extent that consideration other than beneficial interests
in the transferred assets is received in exchange. (See Note 17P).
V. Earnings (loss) per Ordinary Share
Basic and diluted earnings (loss) per Ordinary Share are presented in
conformity with SFAS No. 128, "Earnings Per Share". Basic earnings
(loss) per Ordinary Share are calculated by dividing the net earning
(loss) attributable to Ordinary Shares, by the weighted average number
of Ordinary Shares outstanding. For purposes of determining diluted
earnings per share, potential common stock includes the effects of
dilutive stock options. The effect on the number of shares of such
potential common stock is computed using the treasury stock method.
Diluted earnings per share excludes the impact of anti dilutive
securities, which are those securities resulting in an increase in
earnings per share or a decrease in loss per share.
W. Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recognized when
it is probable that a liability has been incurred and the amount of the
assessment can be reasonably estimated.
X Impairment of loans
The Company applies the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures" These standards apply to loans, which are restructured
in a troubled debt restructuring, involving modifications of terms of
the loans, including those involving a receipt of assets in partial
satisfaction of a receivable.
In accordance with SFAS No. 114, a loan is impaired when it is
probable, based on current information and events, that the creditor
will be unable to collect all amounts (contractual interest and
principle payments) due according to the contractual terms of the loan
agreement. Impaired loans are written down to the present value of
their expected future cash flows, discounted at the loan's effective
interest rate or, alternatively, based on the observable market price
of the loan or the fair value of the collateral, if the loan is
collateral-dependent.
F-259
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
Y. Employee Severance Benefits
Under Israeli law and labor agreements, the Company is required to make
severance and pension payments to their retired or dismissed employees
and to employees leaving employment in certain other circumstances. The
liability for Employee Severance Benefits is based on salary components
as prescribed in the existing labor agreement. The liability for
severance pay is calculated on the basis of the latest salary paid to
each employee multiplied by the number of years of employment. The
liability is covered by the amounts deposited including accumulated
income thereon as well as by the unfunded provision.
The US subsidiaries sponsor a section 401(k) defined contribution plan
or 401(a) plan which permits its employees to invest up to certain
amounts of their compensation (subject to limitation by Internal
Revenue Service Regulations) on a pretax basis in certain self-directed
investment programs. The subsidiaries may, at the discretion of the
Board of Directors, make contributions to the plan.
The provision for severance pay includes amounts related to employees
in countries other than Israel and the U.S. and are calculated in
accordance with the rules of the country in which they operate.
F-260
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 2 - Investment Securities and Deposits
December 31 December 31
2005 2004
$ in thousands $ in thousands
-------------- --------------
Short-term:
Short-term deposits (see Note 17B.) 1,540 5,628
Marketable securities:
Available for sale securities* 4,699 -
Held to maturity securities 35,065 19,086
-------------- --------------
41,304 24,714
============== ==============
Long-term:
Long-term deposits 12,762 11,659
Available for sale securities* 37,707 10,694
Held to maturity securities 89,495 97,006
-------------- --------------
139,964 119,359
============== ==============
* As of December 31, 2005 and 2004, the Company had net unrealized
gains on Available for Sale Securities of $ 4,238 and $ 2,341
thousand, respectively.
The amortized cost, gross unrealized holding gains (loss), and fair
value of held-to-maturity securities by major security type at December
31, 2005, were as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
$ in thousands $ in thousands $ in thousands $ in thousands
-------------- -------------- -------------- --------------
Held to maturity
U.S. Government agencies 46,919 - (648) 46,271
Corporate debt securities 44,844 20 (610) 44,254
Other 32,797 35 - 32,832
-------------- -------------- -------------- --------------
124,560 55 (1,258) 123,357
============== ============== ============== ==============
F-261
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 2 - Investment Securities and Deposits (cont'd)
The amortized cost, gross unrealized holding gains (loss), and fair
value of held-to-maturity securities by major security type at December
31, 2004, were as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
$ in thousands $ in thousands $ in thousands $ in thousands
-------------- -------------- -------------- --------------
Held to maturity
U.S. Government agencies 46,925 - (423) 46,502
Corporate debt securities 43,338 - (525) 42,813
Other 25,829 35 - 25,863
-------------- -------------- -------------- --------------
116,092 35 (948) 115,178
============== ============== ============== ==============
Maturities of debt securities classified as held-to-maturity were as follows at December 31, 2005:
Amortized Fair
Cost value
$ in thousands $ in thousands
-------------- --------------
Held to maturity:
First year 35,065 34,693
Due after one year through five years 88,100 87,223
Due after five years through ten years 1,396 1,441
-------------- --------------
124,560 123,357
============== ==============
F-262
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 2 - Investment Securities and Deposits (cont'd)
The following table shows the fair value of the Company's investments
in marketable securities with unrealized losses that are not deemed to
be other-than-temporarily impaired, and their underlying gross
unrealized losses aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss
position.
As of December 31, 2005:
Less than 12 months 12 months or Greater
------------------------------ ------------------------------ Total
Unrealized Unrealized Total Unrealized
Fair value Losses Fair value Losses Fair value losses
-------------- -------------- -------------- -------------- -------------- --------------
$ in thousands $ in thousands $ in thousands $ in thousands $ in thousands $ in thousands
-------------- -------------- -------------- -------------- -------------- --------------
US Government
Agencies 1,982 18 44,289 630 46,271 648
Corporate bonds 5,522 144 36,339 466 41,861 610
-------------- -------------- -------------- -------------- -------------- --------------
Total 7,504 162 80,628 1,096 88,132 1,258
============== ============== ============== ============== ============== ==============
As of December 31, 2004:
Less than 12 months 12 months or Greater
------------------------------ ------------------------------ Total
Unrealized Unrealized Total Unrealized
Fair value Losses Fair value Losses Fair value losses
-------------- -------------- -------------- -------------- -------------- --------------
$ in thousands $ in thousands $ in thousands $ in thousands $ in thousands $ in thousands
-------------- -------------- -------------- -------------- -------------- --------------
US Government
Agencies 40,344 315 6,581 108 46,925 423
Corporate bonds 26,419 377 16,919 148 43,338 525
-------------- -------------- -------------- -------------- -------------- --------------
Total 66,763 692 23,500 256 90,263 948
============== ============== ============== ============== ============== ==============
The unrealized losses on the Company's investments in US Government
Agencies and corporate bonds were caused by interest rate increases.
Because the Company has the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, the
Company does not consider these investments to be impaired as of
December 31, 2005 and 2004.
F-263
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 3 - Inventories
Consist of the following:
December 31 December 31
2005 2004
$ in thousands $ in thousands
-------------- --------------
Raw materials and components 47,970 39,773
Work in process 23,839 31,983
Finished products 75,154 103,309
146,963 175,065
Note 4 - Long-Term Receivables, Net of Current Maturities
A. Consist of the following:
Weighted
average interest
rate as of
December 31 December 31 December 31
2005 2005 2004
% $ in thousands $ in thousands
-------------- -------------- --------------
Long-term receivables (1) 5.3 19,905 186,604
Less deferred interest income (*) 64 -
Total (2) 19,841 186,604
Less - provision for uncollectible receivable (**) 624 77,252
Less - current maturities 10,944 19,377
-------------- --------------
8,273 89,975
============== ==============
The receivables are denominated in U.S. dollars.
(*) The deferred interest income represents the difference between the original amount
of the receivables and their net present value computed, at the transaction date,
by the relevant interest rate.
(**) See Note 4C.
(1) Long-term receivables ("receivables") consist mainly of receivables resulting from
sales of the Company's products, providing from one to five years credit
commencing on the date of signing of the sales contract or the finance agreement
related thereto or other date as mentioned in the contract. Such receivables are
interest bearing and are payable in quarterly or semi-annual payments. The
principal is paid generally after the grant of a grace period. These receivables
are partially secured by trade risk insurance policies.
F-264
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)
A. Consist of the following: (cont'd)
(2) In the opinion of the Company's management, due to the nature
of the customers and their activities, their financial
performance, updated financial and business data, previous
business relations and existing trade insurance as stated
above, as well as provision for doubtful debts, the Company
has limited risk exposure in relation to the long-term
receivables.
B. Aggregate maturities are as follows:
December 31
2005
$ in thousands
--------------
First year (current maturities) 10,944
Second year 8,227
Third year 675
Fourth year -
Fifth year -
Thereafter 59
--------------
19,905
==============
C. 1. In 2000, the Company and a subsidiary (InnoWave) entered
into an agreement for the sale to Global Village Telecom
("GVT"), a Brazilian company, of wireless local loop systems
and services. Pursuant to the agreement, the Company agreed to
grant GVT long-term financing for the purchase, comprising a
line of credit of up to $168 million, based upon the progress
of sales. This financing was granted in conjunction with
credit made available to GVT by a group of other equipment
vendors. The credit was to be repaid during the years 2004
through 2007. The interest payable under the line of credit
was variable (ranging from LIBOR plus 6.5% to LIBOR plus 4.5%
). As security for its obligations under the agreement, GVT
granted the Company (together with three other major
international suppliers) a charge on its license to operate
its communications network in Brazil, together with additional
security including shareholders' guarantees and charges on
revenue and contracts.
F-265
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)
C. (cont'd)
2. Due to various business reasons, including a
significant devaluation of the Brazilian currency
relative to the dollar, commencing December 2002, GVT
defaulted in its payments to the Company.
Accordingly, during 2002 and 2003, the Company
recorded a provision for doubtful debts, in the
amount of $34.0 million and $ 6.6 million,
respectively with respect to this debt.
3. Following extensive negotiations, agreements to
reschedule GVT's debt repayments were signed in
December, 2004 among GVT, its shareholders and its
principal creditors, including the Company. These
agreements encompassed GVT's commercial debt to the
creditors for the supply of equipment and services,
the debt due under certain convertible notes received
from GVT's parent company and accumulated interest on
the debts to the closing. As a precondition to the
closing of these agreements, the sum of $5.4 million
was paid to the Company. The main provisions of the
agreements, as regards the Company, are:
o All the existing debts were canceled and in
place thereof GVT issued to the Company
notes in the aggregate sum of approximately
$163 million to be paid from 2005 through
2013 at variable rates of interest.
o The Company was granted warrants which were
convertible, at no further consideration,
into shares of GVT's parent company,
equating to approximately 2.4% of its
outstanding share capital.
4. According to SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan", the carrying amount of the
restructured debt was recognized based on the present
value of the expected future cash flows discounted at
the debt 's original contractual interest rate which,
was LIBOR plus 6.5%.
5. In April 2005, the Company sold the long-term
receivables from GVT to ABN Amro Bank for the sum of
approximately $ 96 million in cash, plus a contingent
amount of approximately $ 3.3 million, resulting in
the recognition of a net gain from recovery of
doubtful debt of $ 10.4 million (excluding the
contingent amount), which was recognized in the year
ended December 31, 2005 under income from recovery of
doubtful debt.
F-266
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 5 - Investments
Consist of the following:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Affiliated company (A) 11,976 16,259
Loans (B) 3,000 6,000
Other 4,811 4,507
-------------- --------------
19,787 26,766
============== ==============
A. The investment in affiliated company is comprised of:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Cost of shares 28,223 28,223
Accumulated losses (16,247) (11,964)
-------------- --------------
11,976 16,259
============== ==============
The following table shows the financial information of an affiliated
company for the year ended December 31, 2004 (the financial information
as of and for the year ended December 31, 2005 is not considered and
accordingly has not been presented).
2004
$ in thousands
--------------
Balance sheet information
Current assets 65,832
Total assets 72,345
Current liabilities 40,230
Total liabilities 43,355
Shareholders' equity 28,990
Statement of operations information
Revenues 48,612
Gross profit 36,207
Net loss (7,996)
F-267
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 5 - Investments (cont'd)
B. Loans
In December 2004, the Company signed a series of transactions with
Chiaro Networks Ltd. ("Chiaro") a developer of infrastructure-class
IP/MPLS routing platforms. The transactions consisted of: (1) a loan
agreement (2) a call option agreement for the acquisition of Chiaro by
the Company and (3) a distribution agreement.
1. Loan agreement
In December 2004, the Company provided to Chiaro two loans in
the aggregate amount of $ 6 million ($ 3 million each loan).
The Company had the right to convert one of the loans at any
time into convertible preferred BB shares of Chiaro.
The loans are secured by a first-priority floating charge over
substantially all of Chiaro's assets.
During the first half of 2005, the business of Chiaro
deteriorated significantly and in January 2006, Chiaro has
ceased doing business. Accordingly, Management has determined
that the Company may be unable to collect all amounts due
according to the contractual terms of the loans agreement and
therefore, a provision of $ 3 million in respect thereof has
been recorded in the consolidated financial statements for the
year ended December 31, 2005. The Company as the sole secured
creditor has taken the steps necessary to realize the assets
Chiaro had, including cash, tangible assets and intellectual
property. The Company believes that the fair market value of
Chiaro's remaining assets is no less than the carrying amount
as of December 31, 2005 of Chiaro's debt.
2. Call option agreement
The Company had the option to acquire Chiaro under terms
defined in the agreement. The term of the option was 37.5
months.
3. Distribution agreement
The Company received exclusive, global distribution rights for
Chiaro's products, for a period of 37.5 months from closing.
F-268
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
----------------------------------------------------------------------------------------------------------------------------
Note 6 - Property, Plant and Equipment, Net
Property, plant and equipment as of December 31, 2005 consist of the following:
Freehold
land,
buildings and Machinery Office
leasehold and Information furniture and
improvements equipment technology equipment Other Total
----------- ----------- ----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- ----------- ----------- -----------
Cost
Balance at
beginning of year 70,343 120,936 56,638 5,949 5,452 259,318
Acquisitions 111 3,032 365 121 105 3,734
Additions 3,243 15,487 4,799 783 236 24,548
Disposals 5,124 12,457 911 1,007 2,655 22,154
----------- ----------- ----------- ----------- ----------- -----------
Balance at end
of year 68,573 126,998 60,891 5,846 3,138 265,446
----------- ----------- ----------- ----------- ----------- -----------
Accumulated
Depreciation and
amortization
Balance at
beginning of year 20,043 70,334 41,033 4,567 3,988 139,965
Depreciation
for the year 1,571 13,415 7,229 556 542 23,313
Disposals 900 12,418 900 987 2,218 17,423
----------- ----------- ----------- ----------- ----------- -----------
Balance at end
of year 20,714 71,331 47,362 4,136 2,312 145,855
----------- ----------- ----------- ----------- ----------- -----------
Net book value at
December 31, 2005 47,859 55,667 13,529 1,710 826 119,591
=========== =========== =========== =========== =========== ===========
Net book value at
December 31, 2004 50,300 50,602 15,605 1,382 1,464 119,353
=========== =========== =========== =========== =========== ===========
Regarding pledge, see Note 14.
F-269
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
----------------------------------------------------------------------------------------------------------------------------
Note 7 - Software Development Costs, Net
Capitalization and amortization of software development costs as of
December 31, 2005, and 2004 is as follows:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Balance at beginning of year 14,435 16,289
Capitalization of software development costs during the year 8,014 11,151
Amortization and write-offs during the year (10,450) (13,005)
-------------- --------------
11,999 14,435
============== ==============
Note 8 - Goodwill
Consist of the following:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Goodwill - Broadband Access Division 1,039 1,039
Goodwill - Data Networking Division 37,036 -
Goodwill - Optical Networks Division 1,230 -
-------------- --------------
Goodwill (1) 39,329 1,039
============== ==============
(1) Original amount 177,427 139,137
Amortization and write down due to decline in value (138,098) (138,098)
-------------- --------------
39,329 1,039
============== ==============
See Note 19.
Note 9 - Other Assets, Net
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Core Technology Products (1) 35,423 -
Deferred tax 9,893 9,144
Other intangible assets 2,340 -
-------------- --------------
47,656 9,144
============== ==============
(1) Original amount 38,169 -
Amortization * (2,746) -
-------------- --------------
35,423 -
============== ==============
* Amortized over the expected useful life of the related products, generally between 7 to 10 years.
F-270
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 10 - Liability for Employee Severance Benefits
A. Employees of the Company and of its consolidated subsidiaries
in Israel (Israeli companies)
Under Israeli law and labor agreements, the Israeli companies are
required to make severance and pension payments to their retired or
dismissed employees and to employees leaving employment in certain
other circumstances.
1. The liability in respect of most of its non-senior employees
is discharged by participating in a defined contribution
pension plan and making regular deposits with a pension fund.
The liability deposited with the pension fund is based on
salary components as prescribed in the existing labor
agreement. The custody and management of the amounts so
deposited are independent of the companies and accordingly
such amounts funded (included in expenses on an accrual basis)
and related liabilities are not reflected in the balance
sheet.
2. In respect of the liability to other employees, individual
insurance policies are purchased and deposits are made with
recognized severance pay funds.
The liability for severance pay is calculated on the basis of
the latest salary paid to each employee multiplied by the
number of years of employment. The liability is covered by the
amounts deposited including accumulated income thereon as well
as by the unfunded provision.
3. As to the union employees of Tadiran Telecommunication Ltd.
(TTL) who are covered by the labor agreements which were in
force in TTL, the Company's liability for severance pay is in
accordance with such labor agreements.
If the Company terminates the employment of these employees
through 2011, they are entitled to additional benefits. After
that time, the employees will no longer be eligible for such
additional benefits.
4. The expenses in respect of severance and pension pay (not
including expenses in restructuring) for the years ended
December 31, 2005, 2004 and 2003 are $ 6,009 thousand, $ 4,008
thousand and $ 5,593 thousand respectively.
5. Company's net liability for employee severance benefits is
composed as follows:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Liability for employee
severance benefits 48,340 50,943
Less: Assets held for
severance benefits 25,931 25,182
-------------- --------------
22,409 25,761
============== ==============
Withdrawals from the funds may be made only for the purpose of
disbursement of severance pay.
F-271
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 10 - Liability for Employee Severance Benefits (cont'd)
B. Employees of U.S. consolidated subsidiaries (U.S. companies)
The subsidiaries sponsor a section 401(k) defined contribution plan or
401(a) plan which permits its employees to invest up to certain amounts
of their compensation (subject to limitation by Internal Revenue
Service Regulations) on a pretax basis in certain self-directed
investment programs. The subsidiaries may, at the discretion of the
Board of Directors, make contributions to the plan. Company
contributions with respect to this plan were $ 482 thousand, $ 244
thousand and $ 499 thousand in 2005, 2004 and 2003, respectively.
C. Employees in the rest of the world
The provision for severance pay includes amounts related to employees
in countries other than Israel and the U.S. and are calculated in
accordance with the rules of the country in which they operate.
Note 11 - Commitments and Contingencies
A. Claims and potential claims
1. Following the reduction in workforce in accordance with the
reorganization plan of the Company that was implemented in
2002, claims and demands for higher amounts of severance pay
were submitted by certain former employees. Management of the
Company believes, based on the opinion of its legal advisors,
that the effect, if any, of the results of such claims and
demands on the financial position of the Company and the
results of its operations, will be immaterial and the
provisions which are included in the financial statements in
respect thereof are appropriate and sufficient.
2. The Company conducts negotiations from time to time with
international technology companies ("technology companies")
regarding allegations that it is using certain patents owned
by the technology companies in its products. Although the
Company cannot assess each negotiation for its merit, it
estimates that any settlement, if needed, will not have a
material adverse effect on the Company's financial position or
results of operations.
3. In December 1999, an agreement was signed with SCI Systems
("SCI") for the sale of a plant which manufactures electronic
components. SCI is one of the largest manufacturers of
electronic components in the world. As part of the agreement,
SCI will, for several years to come, be the subcontractor for
part of the manufacturing activities of the Company, on a cost
plus basis.
The Company is in dispute with SCI as to the interpretation of
certain aspects of the agreement, such as volume commitments;
discount terms for large orders; the minimum size of orders;
timing; untimely payments etc.
The dispute was referred to an arbitrator in December 2002. As
part of the arbitration process, SCI submitted, in April 2003,
claims in an aggregate amount of approximately $ 30 million.
F-272
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
A. Claims and potential claims (cont'd)
The Company rejected the allegations made against it and filed
a claim against SCI in an amount of approximately $ 50
million.
Subsequently, the arbitration was put on hold and the parties
appointed an independent mediator in an additional attempt to
settle this dispute. If the mediation fails, the parties will
resume the arbitration process.
In the opinion of the Company's legal counsel, it is not
possible at this stage of the proceedings, to evaluate the
chances of the Company's claim as well as the chances of SCI's
claim.
In the opinion of Management, the arbitrator's decision will
not have a material adverse effect on the Company's financial
position or results of its operation.
4. Several claims have been submitted against the Company and
against consolidated subsidiaries, resulting from ordinary
business operations inter alia, for using patents owned by
others. The Company's Management based mainly on opinions of
its legal advisors, believes that the effect, if any, of the
results of such claims on the financial position of the
Company and the results of its operations will be immaterial
and the provisions which are included in the financial
statements in respect thereof are appropriate and sufficient.
5. In October 1997, an investigation was commenced by the Israeli
Comptroller of Restrictive Trade Practices ("comptroller")
regarding alleged price fixing and non-competitive practices
among Tadiran Telecommunications Ltd. ("TTL"), Tadiran Ltd
("Tadiran" - the parent company of TTL) and Telrad
Telecommunications and Electronics Industries Ltd., a
subsidiary of Koor Industries Ltd. (a significant shareholder
of the Company and Tadiran Ltd.).
In the 1999 merger agreement between the Company and TTL,
Tadiran. had agreed to indemnify the Company for damages above
$6 million.
In 2004, the Company was informed that the comptroller has
ceased the investigation without taking any action against the
Company. Accordingly, a provision in the amount of $6 million
that was recorded at the time of the acquisition of TTL was
reversed and recorded as other income.
6. In September 2004, following the completion of the
investigation by the comptroller mentioned above, a claim was
filed against Bezeq (Israel's national telecommunications
provider), Koor, TTL, Tadiran and Telrad in the District Court
of Tel Aviv-Jaffa. Attached to the claim was a request for
certification thereof as a class action, brought in the name
of all Bezeq customers against the aforesaid companies,
including the Company, in an amount of $ 371 million.
In March 2005 the Company and the other respondents filed
their respective answers to the request to certify the claim
as a class action. The applicant filed his reply to the
respondents' answers in December 2005.
Management of the Company believes, in light of the advice of
its legal counsel, that the allegations against the Company
are without merit and therefore no provision was recorded in
respect thereto in the financial statements.
F-273
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
A. Claims and potential claims (cont'd)
7. In January 2005, the Company was named as a defendant in a
purported class action complaint filed in the United States
against ECtel, certain officers and directors of ECtel, and
ECI. The complaint alleges violations of U.S. Federal
Securities Laws by ECtel and breach of fiduciary duties by the
individual defendants, in connection with disclosure of
ECtel's financial results between April 2001 and April 2003.
It also alleges that ECI was the controlling shareholder of
ECtel during this period and, as such, influenced and
controlled the purported actions by its subsidiary. Damages
claimed by the plaintiff have not yet been quantified.
ECI based on the opinion of its legal advisors believes that
the allegations made in the complaint with respect to it are
without merit, , and accordingly no provision in respect
thereof has been included in the consolidated financial
statements.
B. Lease commitments
The Company and its consolidated subsidiaries have entered into several
operating lease agreements in Israel and abroad. The agreements expire
on various dates from 2006 to 2011 (some of which have renewal options)
and are in local currencies or linked to the dollar or to the Israeli
Consumer Price Index.
Rental expenses under operating leases is charged to expense over the
periods of the respective leases by the straight-line method. Future
minimum annual rent payments to which the Company and its subsidiaries
are committed under the above leases, at rates in effect at December
31, 2005, are as follows:
Year ending December 31 $ in thousands
----------------------- --------------
2006 13,281
2007 11,660
2008 8,747
2009 3,484
2010 and thereafter 2,397
As to rent expense under the Company's leases, see Note 17N.
C. Royalty commitments
1. The Company is committed to pay royalties to the Government of
Israel on proceeds from sale of products in the Research and
Development of which the government participated by way of
grants. The royalties are computed mainly at the rates of 3.5%
to 5% of the aggregated proceeds from sale of such products,
up to the amount not exceeding 100% of such grants plus
interest at Libor rate. As of December 31, 2005, the maximum
possible future commitment of the Company is approximately $
135.3 million (excluding interest). See Note 17H with regard
to amounts paid pursuant to these commitments.
2. The Company is committed to pay royalties to certain parties
whose products, patents or technology are incorporated in
certain products of the Company. Such royalties are based on
sales of systems or a family of products incorporating such
products, patents or technology and are paid based either on a
fixed rate, a price per unit sold or as a rate of the system
or the family of products sale price.
F-274
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments
1. Derivative financial instruments
The Company has significant international sales transactions
in foreign currencies and has a policy of hedging forecasted
and actual foreign currency risk with forward foreign exchange
contracts and purchased and written options. The Company's
forward foreign exchange contracts and purchased options are
primarily denominated in Euro, Pounds Sterling and NIS and are
for periods consistent with the terms of the underlying
transactions, generally one year or less. Derivative
instruments are employed to eliminate or minimize certain
foreign currency exposures that can be identified and
quantified. The Company was exposed to but realized no losses
from non-performance by counter parties on these derivatives.
The Company uses foreign currency forward contracts designated
as fair value hedges to protect against the foreign currency
exchange rate risks related to the remeasurement of firm sales
commitments and recognized assets such as accounts receivable.
Changes in the fair value of these derivatives are recognized
in operations as offsets to the changes in the fair value of
the related assets or liabilities.
The Company uses a combination of forwards and purchased and
written options designated as cash flow hedges to protect
against the foreign currency exchange rate risks inherent in
its forecasted revenue denominated in currencies other than
the U.S. dollar. The Company's cash flows hedges mature
generally within less than a year. For derivative instruments
that are designated and qualify as cash flow hedges, the
effective portions of the gain or loss on the derivative
instruments are initially recorded in accumulated other
comprehensive income (loss) as a separate component of
shareholders' equity and subsequently reclassified into
operations in the period during which the hedged transactions
is recognized in operations. The ineffective portion of the
gain or loss is reported in financial income or expenses
immediately. The effective portion of cash flow and foreign
currency hedges is reported in the same financial statement
line item as the changes in value of the hedged item. For
foreign currency option and forward contracts designated as
hedges, hedge effectiveness is measured by comparing the
cumulative change in the hedge contract with the cumulative
change in the hedged item, both of which are based on forward
rates.
Up until February 2005 the Company had used variable-rate debt
to finance its operations. The debt obligations exposed the
Company to variability in interest payments due to changes in
interest rates. Management believes that it is prudent to
limit the variability of a portion of its interest payments.
To meet this objective, management entered into interest rate
swap agreements to manage fluctuations in cash flows resulting
from interest rate risk. These swaps change the variable-rate
cash flow exposure on the debt obligations to fixed cash
flows. Under the terms of the interest rate swaps, the Company
received variable interest rate payments and made fixed
interest rate payments, thereby creating the equivalent of
fixed-rate debt.
Changes in the fair value of interest rate swaps designated as
hedging instruments that effectively offset the variability of
cash flows associated with variable-rate, long-term debt
obligations are reported in accumulated other comprehensive
income (loss). These amounts are subsequently recognized in
interest expenses as a yield adjustment of the hedged interest
payments, in the period in which the related interest affects
earnings.
F-275
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments (cont'd)
1. Derivative financial instruments (cont'd)
The Company has entered into a long term agreement to provide
a customized network solution to a customer in Central
America. The network build-out will begin in 2006. This
transaction will be financed by a commercial bank ("the
bank"), in the form of a long-term loan to an intermediate
regional bank. The intermediate bank will repay the loan to
the bank at a fixed interest rate. As the bank requires the
payment of the interest at a floating rate, the Company is to
pay or receive the differential between the fixed interest
rate paid by the intermediate bank and the floating interest
rate required by the bank under the loan agreement.
The Company believes that it is prudent to mitigate the
exposure to interest rate fluctuations in respect of the above
transaction. To meet this objective, in October 2005 the
Company entered into interest rate swap agreements to manage
fluctuations in cash flows resulting from interest rate
changes. Under the terms of the interest rate swaps, the
Company will receive floating interest rate payments and will
make fixed interest rate payments, which will create a fixed
gain on the finance portion of the project.
Changes in the fair value of interest rate swaps designated as
hedging instruments that effectively offset the variability of
cash flows associated with variable-rate obligations are
reported in accumulated other comprehensive income (loss).
These amounts are subsequently recorded as interest income
(expenses), as a yield adjustment of the hedged interest
payments, for the period in which the related interest affects
earnings
Fluctuations in the fair value of interest rate swaps
designated as hedging instruments that effectively offset the
variability of cash flows associated with variable-rate,
long-term debt obligations are reported in accumulated other
comprehensive income (loss). These amounts subsequently are
reclassified into interest expense as a yield adjustment of
the hedged interest payments in the same period in which the
related interest affects earnings.
Other derivatives not designated as hedging instruments under
SFAS No. 133 consist primarily of purchase and written options
used to hedge foreign currency cash flows. For derivative
instruments not designated as hedging instruments under SFAS
No. 133, changes in the fair values are recognized in
operations in the period of change.
Fair value hedging transactions
-------------------------------
As of December 31, 2005, the Company did not have outstanding
currency forward contracts, as a hedge against sales contracts
receivable and firm commitments.
F-276
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments (cont'd)
1. Derivative financial instruments (cont'd)
Anticipated cash flow hedging transactions
------------------------------------------
As of December 31, 2005, the Company had entered into forward
exchange contracts and also purchased and written options as
hedges for currency exchange rates for various periods of
time. These transactions constitute a future cash flow hedge
for sales agreements and for the anticipated backlog of
orders.
As of December 31, 2005, the Company had entered into 85 hedge
transactions in respect of anticipated sales amounting to $
183.6 million, (in Euro currency), and $ 17.5 million (in
Pounds Sterling currency).
The hedge transactions are shown in the balance sheet at fair
value. The fair value of future transactions is based on
future exchange rates, as quoted at the balance sheet date.
As of December 31, 2005, the fair value of the cash flow
hedging transaction is a net asset of $ 8.0 million.
Payroll and purchase contracts
------------------------------
As of December 31, 2005, the Company had entered into 77
future cash flow hedge transactions in respect of payroll and
purchase contracts amounting to $ 364.9 million (in NIS
currency).
As of December 31, 2005, the Company had entered into one
future cash flow hedge transaction in respect of purchase
contract amounting to $ 2.4 million (in Euro currency). As of
December 31, 2005, the fair value of the cash flow hedging
transactions is credit US$ 0.5 million.
Realized/unrealized gain (losses) from hedge transactions
---------------------------------------------------------
The Company had net realized foreign currency exchange gain
(losses) from all hedge transactions of $ 2.5 million, $
(11.0) million and $ (6.9) million in 2005, 2004 and 2003,
respectively.
Comprehensive income for the year ended December 31, 2005
includes an unrealized gain of $ 19.2 million relating to the
above hedge transactions. As of December 31, 2005 the net
unrealized gain on financial instruments is $ 4.2 million.
This amount is expected to appear in the consolidated
statement of operations for the year ended December 31, 2006.
Interest rate cash flow risk
----------------------------
Interest expense for the years ended December 31, 2005, 2004
and 2003, includes net losses in the amount of $ 38 thousand,
$ 294 thousand and $ 502 thousand, respectively, arising from
the difference between the fixed interest rate in the interest
rate swap agreements and the variable interest rate on the
hedged debt obligation.
F-277
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments (cont'd)
1. Derivative financial instruments (cont'd)
Non-hedging transactions
------------------------
The financing expenses include an income of $ 0.5 million, a
loss of $ 0.2 million and a loss of $ 2.0 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
These amounts reflect the changes in the time value factor of
the derivatives, which are not considered as hedging
transactions.
2. Concentration of credit risks
Financial instruments which expose the Company to risks of
credit concentration include cash, deposits, currency hedging
transactions, trade and other receivables.
The cash and deposits as well as the hedging transactions are
deposited and/or executed through a number of established
financial institutions. These financial institutions are
located in Israel, the USA and Europe. The policy of the
Company is to avoid the risk of making deposits with one
financial institution. The Company frequently evaluates the
amounts and volume of the transactions executed with each one
of the said financial institutions. The exposure in respect of
credit to customers is limited due to the large number of
customers and their geographical spread.
As to the long-term deposits and customer debts see Note 4.
Management of the Company believes that the credit risk is
limited since the customers are large suppliers of
communications services operating in countries in which this
sector is anticipated to grow.
3. Fair value of the financial instruments
Management estimates that the fair value of the financial
instruments is not materially different from the amounts
included in the financial statements. In its determination of
fair value, management used certain estimates, as described
below, which do not necessarily indicate amounts which are
recoverable in current market trading
- Cash and cash equivalents, short-term investments,
trade receivables, other receivables, trade payables,
other payables and accrued liabilities - the book
value is the same as the fair value due to the short
realization period of these instruments.
- Long-term receivables and liabilities - the book
value is not materially different from the fair value
since the Company's interest rates on its long-term
receivables or liabilities are not materially
different from those indicated in respect of the
related assets and liabilities as of the balance
sheet date.
F-278
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
E. Capital expenditure commitments
The Company in Israel incurs capital expenditures pursuant to "Approved
Enterprise" programs. At December 31, 2005, the Company is not
committed to invest pursuant to existing programs.
F. Purchase commitments
At December 31, 2005, the Company has commitments, in amount of $ 63.4
million, covering, primarily, the purchase of materials. (December 31,
2004 - $ 64.7 million).
G. Guarantees
1. The Company maintains certain third-party guarantees with
banks to support its performance obligations under customer
contracts and other contracts that can be demanded in case of
material breach of contracts. As of December 31, 2005, these
guarantees approximated $ 30,125 thousand.
2. The Company also maintains other third-party guarantees
(primarily with insurance companies) to support its
performance obligations under customer contracts and other
contracts that can be demanded in case of material breach of
contracts. As of December 31, 2005, these guarantees
approximated $ 4,502 thousand.
H. Commitments
1. In November 2001, the Company sold its information technology
unit ("IT") to EDS and signed a five-year outsourcing contract
with EDS. Under the agreement, EDS assumed all the IT
operations and was required to supply maintenance, support and
development services during the term of the agreement, for a
sum of between $ 15 and $ 18 million, per year. In 2003 a new
five-year agreement replacing the previous agreement was
signed with effect through 2007. The Company undertook to pay
EDS $ 11.8 million in 2003 and amounts between $ 8.8 million
and $ 7.8 million in 2004-2007 (in 2005 and in 2004 the
Company paid to EDS $ 8.6 million and $ 8.8 million,
respectively). In addition, for the years ended December 31,
2005, 2004 and 2003, the Company paid EDS $ 1.7 million, $ 3
million and $ 2.2 million, respectively, for additional
services.
2. The Company has an obligation to indemnify the purchasers of
certain activities and/or the purchasers of subsidiaries at
rates which are stipulated in the sales agreement, should the
purchasers be forced to discharge former employees of TTL
during a period up to 2011 (see Note 10A(3)) and, therefore,
to pay increased severance benefits.
In the opinion of Company management, the provisions for
future indemnification, as stated, which are included in the
financial statements, are proper and adequate.
F-279
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
H. Commitments (cont'd)
3. If the Company dismisses any of the remaining unionized
employees who joined from TTL by 2011, it is committed to pay
them increased severance benefits or early retirement
pensions, depending on age and seniority (see Note 10A(3)). As
of December 31, 2005, the maximum amount payable as a result
of this commitment is $ 15.0 million. Management does not
expect to dismiss any of these employees and therefore no
provision in respect thereof has been included in the
financial statements.
4. Commitments to indemnify directors and officers
In 2001, the Board of Directors of ECI resolved to grant ECI's
directors and officers at the level of vice president and
above, who may serve from time to time, indemnification to the
fullest extent permitted by law and approved the form of
indemnification letter provided to each such director and
officer. The Company has undertaken to indemnify its directors
and officers for financial obligations and reasonable
litigation costs imposed on them in connection with their
duties. The undertaking was limited to categories of events
set forth in the indemnification letter and to an amount of $
15 million per director and officer, per case.
In 2002, the audit committee and the Board of Directors of ECI
resolved, to raise the amount of the aforesaid undertaking to
a limit of $ 30 million per director per case, but not more
than a commitment of $ 225 million in the aggregate for all
persons to be indemnified. The aforesaid changes were approved
by ECI's shareholders.
Note 12 - Shareholders' Equity
A. Authorized, issued and outstanding shares
Authorized
---------------------------
December 31 December 31
----------- -----------
2005 2004
----------- -----------
Number of shares
---------------------------
NIS 0.12 par value per ordinary share 200,000,000 200,000,000
=========== ============
1. The Company's shares (NIS 0.12 par value each) are traded in
the United States on the over the counter market and are
listed on the Nasdaq Stock Market.
2. For details of the issued share capital see consolidated
Statements of Changes in Shareholders' Equity.
3. Pursuant to a service agreement with one of the Company's
directors, the Company issued to him in 2005, 2004 and 2003 -
1,387, 1,653 and 5,650 Ordinary shares, respectively. Under
service agreements entered into in 2005 with two additional
directors, they were issued 3,521 and 3,041 restricted shares,
respectively, in that year (the latter amount issued pursuant
to the ECI Restricted Share Plan - see Note 12.C.2).
F-280
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
B. Dividends
According to the Israeli corporate laws, dividends may be paid by the
Company only out of accumulated earnings, or out of net income, in two
consecutive years. See Note 15A(3).
C. Share incentive (stock options and restricted shares plans)
1. The Company's current stock option plans are the ECI Telecom
Ltd. Key Employee Share Incentive Plan 1991 and the ECI
Telecom Ltd. Employee Share Incentive Plan 2002 (together the
"ECI Plans"), which were adopted by the shareholders at the
Annual General Meetings held respectively on August 29, 1991
and November 19, 2002. The ECI Plans will expire on December
31, 2012.
The ECI Plans provide that options may be granted to any
employee, director, consultant or contractor of the Company
pursuant to (a) one or more sub-plans designed to benefit from
the provisions of Section 102 of the Israeli Income Tax
Ordinance (New Version) 1961 and (b) any other share incentive
plan approved by the Board of Directors of the Company.
Under the terms of the ECI Plans, as of December 31, 2005, the
Company is authorized to grant options for a total of
32,760,700 shares (increased from 29,760,700 shares following
shareholders' approval on July 14, 2005), subject to
anti-dilution adjustment. The option awards are personal and
non-assignable and terminate automatically upon termination of
employment (except for approved retirement or termination
caused by death or disability or as otherwise approved by the
Board of Directors or its Remuneration Committee).
Stock option grants during the reporting period
The principal stock option grants made by the Company to its
employees, during the year ended December 31, 2005 were as
stated below. Unless otherwise stated, these stock options
generally vest as follows: 12.5% after six months and 6.25% on
the last day of each following quarter over a period of 14
quarters.
On March 28, 2005, the Company granted options for 171,000
shares at an exercise price of $ 7.07 per share.
On May 10, 2005, the Company granted options for 125,000
shares at an exercise price of $ 7.47 per share.
On May 31, 2005, the Company granted options for 1,520,400
shares at an exercise price of $ 8.85 per share.
On June 3, 2005, the Company granted options for 75,000 shares
at an exercise price of $ 9.01 per share.
On June 21, 2005, the Company granted options for 32,000
shares at an exercise price of $ 8.48 per share.
F-281
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive (stock options and restricted shares plans) (cont'd)
Stock option grants during the reporting period (cont'd)
--------------------------------------------------------
On July 28, 2005, the Company granted options for 77,000 shares at
an exercise price of $ 8.26 per share
On November 20, 2005, the Company granted options for 167,000 shares
at an exercise price of $ 8.22 per share.
On November 22, 2005, the Company granted options for 100,000 shares
at an exercise price of $ 8.35 per share.
On December 5, 2005, the Company granted options for 100,000 shares
at an exercise price of $ 8.42 per share.
On December 7, 2005, the Company granted options for 1,073,250
shares at an exercise price of $ 9.22 per share. The vesting
schedule for 373,250 of these options is 50% after 6 quarters and
6.25% on the last day of each following quarter over a period of 8
quarters, and for 655,000 of such options it is 75% after 10
quarters and 6.25% on the last day of each following quarter over a
period of 4 quarters.
None of the above stock options were granted at exercise prices
below the market price on the date of the grant.
Following approval by the board of directors , the Company's
shareholders approved adjustments to the terms of outstanding stock
option awards, in order to preserve the aggregate intrinsic value of
such stock options in light of the distribution to shareholders of
7.6 million of the Company's shares in ECtel Ltd. (See Note 21B). On
April 30, 2004, immediately prior to the ex-dividend date for the
distribution of the ECtel shares, the closing market price of the
Company's shares on Nasdaq was $5.60 per share. As a result of the
proposed distribution, the opening market price on the business day
immediately following, May 3, 2004, was adjusted to $5.36 per share,
a reduction of $0.24 per share, or 4.305%. The main provisions of
the adjustments are set forth below and applied to stock options
granted prior to May 3, 2004:
o The exercise price of outstanding stock options granted at an
exercise price of less than $5.60 per share, was reduced by
4.305% and rounded upwards to a whole cent.
o The exercise price of outstanding stock options granted at an
exercise price of, or in excess of, $5.60 per share, was
reduced by $0.24 per share.
o Additional 462,939 stock options were granted to employees,
directors or consultants of the Company who, on May 3, 2004,
held stock options with an exercise price of less than $5.60
per share. The number of additional stock options equated to
approximately 4.5% of the said stock options held by such
grantees at May 3, 2004. The additional stock options are
exercisable at a price per share equivalent to the new,
reduced exercise price of the original stock options, and in
the same proportions and will expire on the same dates as the
original stock options.
F-282
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive (stock options and restricted shares plans) (cont'd)
Stock option grants during the reporting period (cont'd)
-----------------------------------------------
There was no accounting consequence for the above changes made to
the exercise price and the number of shares, since the above
adjustments meet the criteria set forth in FIN 44, "Accounting for
Certain Transactions involving Stock Compensation (an interpretation
of APB Opinion No. 25)" as follows:
a. The aggregate intrinsic value of the award immediately after
the change was not greater than the aggregate intrinsic value
of the award immediately before the change.
b. The ratio of the exercise price per share to the market value
per share was not reduced.
2. At the shareholders General Meeting held on July 28, 2005, the
Company's Shareholders adopted the ECI Telecom Ltd. Employee
Restricted Share Incentive Plan (the "ECI Restricted Share Plan").
The ECI Restricted Share Plan will expire on June 4, 2015.
Restricted shares issued under the ECI Restricted Share Plan are
issued from the same pool of shares available for the issue of stock
options under the ECI Plans.
The ECI Restricted Share Plan provides that restricted shares may be
granted to any employee, director, consultant or contractor of the
Company (the "Participant"). The restricted shares are held in trust
on behalf of a Participant until the Participant's interest in such
restricted shares vests and they become freely transferable.
Should a Participant cease to remain in the employ or service of the
Company, for any reason, while holding unvested restricted shares
(except for termination caused by death or as otherwise approved by
the Board of Directors or its Remuneration Committee), then those
restricted shares shall either (i) be immediately surrendered to the
Company for cancellation, or (ii) be immediately sold by the
Participant to the Company (for consideration equal to the issue
price of such shares), or (iii) shall be treated in any other manner
that will assure that the Participants rights in such shares shall
cease to exist; and the Participant shall have no further
shareholder rights with respect to those restricted shares.
Unless determined otherwise by the Remuneration Committee, the
restricted shares shall be fully vested after four years from the
date of issuance according to the following schedule: 12.5% shall
vest following the lapse of six months from the date of issuance and
a further 6.25% shall vest on the last day of each quarter, during
14 consecutive quarters thereafter.
The fair value of the restricted shares as of the date of the issue
is amortized over the vesting period.
Restricted shares issued during the reporting period
----------------------------------------------------
On July 28, 2005, the Company issued 583,585 restricted shares to
its employees. The shares were issued for no consideration. The
shares vest and become transferable a follows: 12.5% on November 30,
2005 and a further 6.25% on the last day of each quarter during 14
consecutive calendar quarter thereafter.
F-283
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive (stock options and restricted shares plans) (cont'd)
On November 20, 2005, the Company issued 159,191 restricted shares
to its employees and a director. The shares were issued for no
consideration. Most of shares vest and become transferable as
follows: 50% on November 7, 2006 and a further 6.25% on the last day
of each quarter during 8 consecutive calendar quarter thereafter.
Unearned compensation on the grant of the restricted shares as
measured at the original grant date, totaling $ 6.1 million, was
calculated based on the market value of the shares on the date of
grants and is being amortized over the vesting period.
Compensation expense of $ 1,999 thousand was recognized for the
restricted shares during the year ended December 31, 2005.
3. Stock options and restricted shares under the ECI Plans are as
follows:
2005 2004 2003
---------------- ---------------- ----------------
Number of shares Number of shares Number of shares
---------------- ---------------- ----------------
Total number authorized at beginning of year 29,760,700 29,760,700 26,760,700
Increase in number authorized during the year 3,000,000 - 3,000,000
Options unexercised at beginning of year (19,439,184) (19,067,545) (12,349,747)
Options exercised till beginning of year (3,483,565) (2,129,800) (2,028,982)
Options granted during the year (3,449,795) * (4,154,481) (10,523,271)
Options cancelled during the year 698,107 2,429,077 3,704,655
Restricted shares granted during the year (742,776) - -
Restricted shares forfeited during the year 9,557 - -
---------------- ---------------- ----------------
Available for future grant at end of year 6,353,044 6,837,951 8,563,355
================ ================ ================
Options exercised during the year ** 1,697,867 1,353,765 100,818
================ ================ ================
** Average price of options exercised
during the year (in $) 2.53 1.83 2.62
================ ================ ================
Restricted shares vested during the year 115,233 - -
================ ================ ================
Options unexercised and unvested restricted
shares at the end of year 21,110,991 19,439,184 19,067,545
================ ================ ================
Options unexercised and unvested restricted shares
may be vested as follows (1):
First year or thereafter 17,168,269 16,840,697 16,540,199
Second year or thereafter 1, 920,649 1,328,180 1,911,858
Third year or thereafter 2,022,073 1,270,307 615,488
---------------- ---------------- ----------------
21,110,991 19,439,184 19,067,545
================ ================ ================
(*) Including grants as a result of distribution of ECtel's shares (see C1 and Note 22B).
F-284
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive (stock options and restricted shares plans) (cont'd)
3. Stock options and restricted shares under the ECI Plans (cont'd)
(1) To be paid in NIS based on the rate of exchange of
the dollar on the date of payment as follows:
2005 2004 2003
---------------- ---------------- ----------------
Dollars per Share (*)(**) Number of shares Number of shares Number of shares
---------------- ---------------- ----------------
Restricted shares 617,986 - -
Zero 2,098,362 2,518,982 2,942,728
1.26 - 3.04 1,966,098 2,213,569 2,587,619
3.11 3,921,429 4,673,266 5,124,326
3.12 - 6.91 3,346,718 3,914,886 568,334
7.07 - 8.48 901,574 187,574 30,000
8.85 1,460,400 - -
9.01 - 9.22 1,148,250 - -
13.76 - 20.76 711,957 748,991 1,134,842
23.76 - 26.14 175,500 176,500 183,500
26.42 2,902,256 3,075,356 3,985,054
27.27 - 29.29 1,231,010 1,295,610 1,792,292
29.76 - 39.76 629,450 634,450 718,850
---------------- ---------------- ----------------
21,110,991 19,439,184 19,067,545
================ ================ ================
(*) The dollars per share exercise range figures were
adjusted as a result of distribution of ECtel's shares
(see C1 and Note 20B).
(**) As of December 31, 2005, the weighted average exercise
price of options was $ 10.20 and the weighted average
remaining contractual life of outstanding options was 6
years.
4. Fair value method
a. In October 1995 the Financial Accounting Standards
Board (FASB) issued SFAS No.123 "Accounting for
Stock-based Compensation" which establishes financial
accounting and reporting standards for stock-based
compensation plans. The statement defines a fair
value based method of accounting for employee
stock-based compensation awards.
As required by SFAS No. 123, the Company has
determined the weighted average fair value per option
of stock-based arrangements grants during 2005, 2004
and 2003 to be $ 3.87, $3.40 and $1.70, respectively.
The fair values of stock based compensation awards
granted were estimated using the "Black - Scholes"
option pricing model with the following assumptions.
Option Expected Risk free
Year of grant Term volatility interest rate
------------- ---- ---------- -------------
2005 3 63 3.80%
2004 5 72 2.00%
2003 5 70 1.00%
F-285
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive (stock options and restricted shares plans) (cont'd)
4. Fair value method (cont'd)
b. Had the compensation expenses for stock options
granted under the Company's stock option plans been
determined based on fair value at the grant dates
consistent with the method of SFAS No. 123, the
Company's net income (loss) and net income (loss) per
ordinary share would have been as follows:
For the year ended December 31
----------------------------------------------------
2005 2004 2003
------------ ------------- ------------
$ in thousands, except per share amounts
----------------------------------------------------
Net income (loss), as reported 39,864 10,153 (71,040)
Add: Stock-based employee
compensation expenses
included in reported net
income (loss), net of related
tax effects (nil) 2,040 1,650 3,568
Deduct: Total stock-based employee
compensation expense
determined under the fair
value based method for
all awards, net of related
tax effects (nil) (10,267) (10,072) (23,450)
------------ ------------- ------------
Pro Forma net income (loss) 31,637 1,731 (90,922)
============ ============= ============
Basic earnings (loss) per ordinary
share ($):
- as reported 0.36 0.09 (0.65)
- pro forma 0.29 0.02 (0.84)
Diluted earnings (loss) per ordinary
share ($):
- as reported 0.34 0.09 (0.65)
- pro forma 0.27 0.01 (0.84)
5. Employee Stock Purchase Plans ("ESPP")
In July 2000, the ECI Telecom Ltd. 2000 Employee Stock
Purchase Plans were approved. Under the ESPP plan all
employees were permitted to purchase shares at a price equal
to 85% of the lower of the fair market value at the beginning
or end of each offering period.
Under the ESPP, during 2003 the Company sold to its employees
418,983 ordinary shares of the Company. The ESPP plan is no
longer in effect.
F-286
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 13 - Balances in Currencies Other Than the Dollar
December 31, 2005
----------------------------------------------------------
Pounds
NIS Euro Sterling Others
--------- --------- --------- ---------
$ in thousands
----------------------------------------------------------
Assets
Trade receivables 12,240 45,907 4,031 17,325
Other current assets (include
discontinued operations) 1,851 7,534 3,554 7,970
Long-term deposits and marketable
securities 15,479 - - -
Asses held for severance benefits 25,931 - - -
--------- --------- --------- ---------
55,501 53,441 7,585 25,295
========= ========= ========= =========
Liabilities
Trade payables 21,182 8,608 575 2,609
Other current liabilities (include
discontinued operations) 11,459 7,680 3,257 5,370
Liabilities for employee severance
benefits 44,782 88 - 509
--------- --------- --------- ---------
77,423 16,376 3,832 8,488
========= ========= ========= =========
[table continued]
December 31, 2004
------------------------------------------------------------
Pounds
NIS Euro Sterling Others
--------- --------- ---------- ---------
$ in thousands
------------------------------------------------------------
Assets
Trade receivables 18,838 35,161 5,285 22,588
Other current assets (include
discontinued operations) 23,460 40,630 1,162 5,360
Long-term deposits and marketable
securities 14,870 - - -
Asses held for severance benefits 25,182 - - -
--------- --------- ---------- ---------
82,350 45,791 6,447 27,948
========= ========= ========== ==========
Liabilities
Trade payables 32,471 8,305 186 2,455
Other current liabilities (include
discontinued operations) 23,297 17,111 3,775 4,897
Liabilities for employee severance
benefits 50,514 - - 190
--------- --------- ---------- ---------
106,282 25,416 3,961 7,542
========= ========= ========== ==========
F-287
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 14 - Charges (Assets Pledged)
In recent years, the Company received loans from Israeli banks,
pursuant to a "Facility Agreement". As part of this Facility Agreement,
the Company pledged its assets (including real estate in Israel) and
undertook an unlimited "negative pledge" obligation on its assets in
favor of those banks. During 2005 the Company reimbursed the banks all
the outstanding loans and signed an agreement with the banks, which
cancels the Facility Agreement, releases the Company from all
obligations and undertakings pursuant thereto and obliges the banks to
release all pledges and securities. At the release of this report, the
formal cancellation from said pledges is in progress but has not been
fully completed yet.
In the fourth quarter of 2005 the Company signed new agreements with
two banks providing off-balance sheet credit facilities to the Company.
As a condition to these facilities by the banks, the Company undertook:
(1) a "negative pledge" obligation on some of the Company's assets (not
including cash and cash equivalent, short-term investment, long-term
deposit and marketable securities) and (2) to maintain certain
financial ratios with regard to the tangible equity of the Company as
defined in the agreements.
See Note 17B for restricted deposits.
Note 15 - Taxes on Income
A. Tax programs under various Israeli tax laws:
1. Israel tax reform
During 2003, tax reform legislation was enacted, which
significantly changed the taxation basis of corporate and
individual taxpayers from a territorial basis to a worldwide
basis. From such date an Israel resident taxpayers are taxed
on income produced and derived both in and out of Israel.
The main provisions of the tax that are relevant to the
Company are as follows:
a) Transfer pricing of international transactions with related
parties.
The Income Tax Ordinance was amended to include
provisions concerning transfer pricing between
related parties, where one of the parties is situated
abroad. The Company considers that the transfer
pricing policy adopted with foreign affiliates and
subsidiaries is economically fair and that it
complies with such regulations.
b) Employee stock incentive plans
The tax reform codified past practice and specified
three alternative tracks for taxing employee stock
option plans. Where a trustee arrangement is in
place, the employer can either claim an expense for
tax purposes while the employee will be fully taxed
up to the maximum marginal tax rate of 49% or the
Company can waive the tax expense deduction and the
employee will pay a reduced tax rate of 25% after
ending of a "trustee period" (pursuant to a more
recent amendment to Income Tax Ordinance effective
from January 1, 2006, twenty-months from the date of
the grant, and prior to 2006 grants, twenty four to
thirty six months from the date of the grant). Where
there is no trustee arrangement, the employee is
fully taxable and no expense deduction is allowed to
the Company. There are detailed provisions for
implementing these arrangements. The Company chose to
waive the tax expense deduction and the employees
will pay a reduced tax rate of 25%.
F-288
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
A. Tax programs under various Israeli tax laws: (cont'd)
c) Controlled foreign company (CFC)
The amendment to the law introduced Controlled
Foreign Company (CFC) provisions, which, in certain
circumstances, will lead to the Israeli company being
charged on passive income of foreign affiliates as if
it had received a dividend from such companies.
d) The seven year limit for carrying forward of capital
losses has been removed with respect to capital
losses arising from 1996 and thereafter.
2. In June 2004 and July 2005, the Knesset (the Israeli
Parliament) approved Amendments (and ancillary Temporary
Orders) to the Income Tax Ordinance (respectively "amendment
No. 140" and "Amendment No. 147", and together the
"Amendments").
The Amendments provide, inter alia, for a gradual reduction in
the statutory corporate tax rate as follows:
Corporate Tax
Tax Years Rate
--------- --------------
2001 through 2003 36%
2004 35%
2005 34%
2006 31%
2007 29%
2008 27%
2009 26%
2010 and thereafter 25%
Pursuant to the Amendments, capital gain tax is reduced to 25%
from Corporate tax rate, (except with respect to capital gains
from marketable securities which continue to be taxed at the
corporate tax rate until 2010), with transitional provisions
for assets acquired prior to January 1, 2003.
In addition, there was a change in the method of calculating
the tax on capital gains arising from the sale of depreciating
assets with effect from January 1, 2003, as defined in
Amendment No. 147.
The amendments also provide for changes in the methodology for
the set-off of losses from taxable income from different
sources.
Amendment No. 147 establishes a new entity within the Israel
Tax authority to make tax pre-ruling following an approach by
a corporation or other taxpayer. Notice of such pre-ruling
shall be in available to the public.
In addition, Amendment No. 147 imposing sanctions with regard
aggressive tax planning, pursuant to guidelines still to be
published as to what constitutes aggressive tax planning.
The current taxes for 2005 (other than an "approved
Enterprise" related income) and the deferred tax balances at
December 31, 2005 are calculated based on the new tax rates,
as prescribed in the Amendments.
The Company has examined the various provisions of the
Amendment and of its implications. In the opinion of
management, the financial effect of the said Amendment is
immaterial.
F-289
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
A. Tax programs under various Israeli tax laws: (cont'd)
3. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959;
Pursuant to the Encouragement of Capital Investments Law -
1959 (The Law"), the Company is entitled to tax benefits
relating to investments in "Approved Enterprises" in
accordance with letters of approval received.
A major part of the production facilities of the Company and
its Israeli subsidiaries has been granted the status of an
"Approved Enterprise" under the Law. According to the Law, a
Company is entitled to an investment grant (up to 24% of
investment cost) and also to a tax benefit, which grants the
Company a reduced tax rate of 25% for a specific period
(Alternative A). The Company's "approved Enterprise" is
subject to zero tax rates under the "Alternative Benefit
Method" (Alternative B) and reduced tax rates (25% - subject
to examination of the level of foreign ownership), for
specified periods. All of the approved enterprises, which
currently entitle the Company to benefits, are under
Alternative B.
Benefits are attributed to an "Approved Enterprise" based on
the growth in turnover upon implementation of each plan.
The period of benefits in respect of most of the Company's
production facilities will terminate in the years 2006-2012.
Some of the company's current investments are made under new
approvals, or under a request of a new approval.
In the event of distribution of cash dividends from income
taxed at zero rate, a reduced tax rate in respect of the
amount distributed would have to be paid. As of December 31,
2005, the Company has an accumulated loss and therefore it
cannot distribute a cash dividend - see Note 12B. Effectively
such dividend distribution would be reduced by the amount of
the tax.
In March 2005, the Knesset approved a reform of the
Encouragement of Capital Investments Law - 1959. The primary
changes are as follows:
o Companies that meet the criteria of the Alternative Path
of Tax benefit ("alternative B" as described above) will
receive those benefits without prior approval. In
addition, there will be no requirement to file reports
with the Investment Center. Audit will take place via the
Income Tax Authorities as part of the tax audits. Request
for pre-ruling is possible.
o For any expansion of investment, a company is required to
invest within three years in production machinery and
equipment a certain percentage of its existing production
machinery and equipment.
F-290
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
A. Tax programs under various Israeli tax laws: (cont'd)
4. Measurement of results for tax purposes under the Income Tax
Law (Inflationary Adjustments), 1985.
Under this law, operating results for tax purposes are
measured in real terms, in accordance with the changes in the
Israeli CPI, or in the exchange rate of the dollar - for a
"Foreign Investors' Company", as defined by the Law for the
Encouragement of Capital Investments, 1959. The Company and
its subsidiaries elected to measure their operating results on
the basis of the changes in the Israeli CPI. As a result the
Company and its Israeli subsidiaries are entitled to deduct
from their taxable income an "equity preservation deduction"
(which partially compensates for the decrease in the value of
shareholders' equity resulting from the annual rise in the
Israel CPI).
5. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969.
The Company is an "Industrial Company" as defined by this Law,
and as such is entitled, among other benefits, to claim
accelerated depreciation of machinery and equipment as
prescribed by regulations issued under the inflationary
adjustments tax law.
6. In 2002 the Company came to an arrangement with the income tax
authorities concerning tax returns filed by TTL through 1998.
Among other terms of the arrangement, the Company undertook to
pay a further $ 1.4 million in taxes if it does not produce
certain confirmations from government agencies in future
periods as defined in the arrangement.
B. Non-Israeli subsidiaries
Non Israeli subsidiaries are taxed based upon tax laws in their
countries of residence.
F-291
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
C. Taxes on income from continuing operations
Taxes on income included in the consolidated statements of operations
are comprised as follows:
Year ended December 31
--------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Current taxes relating to -
The Company and its Israeli subsidiaries 1,672 1,436 1,402
Foreign subsidiaries* 2,626 693 (6,704)
-------------- -------------- --------------
4,298 2,129 (5,302)
-------------- -------------- --------------
Deferred taxes relating to -
The Company and its Israeli subsidiaries (774) - 559
Foreign subsidiaries (70) (205) 6,884
-------------- -------------- --------------
(844) (205) 7,443
-------------- -------------- --------------
Taxes on income 3,454 1,924 2,141
============== ============== ==============
(*) In 2004 - including tax benefits of $ 758 thousand with respect to previous years.
D. Income from continuing operations before taxes on income
Year ended December 31
--------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
The Company and its Israeli subsidiaries 36,600 22,677 (31,395)
Foreign subsidiaries 11,130 (3,005) (6,929)
-------------- -------------- --------------
47,730 19,672 (38,324)
============== ============== ==============
F-292
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
E. Reconciliation of the statutory tax expense (benefit) to actual
tax expense
A reconciliation of the statutory tax expense, assuming all income is
taxed at the statutory rate (see A2 above) applicable to the income of
companies in Israel, and the actual tax expense is as follows:
Year ended December 31
--------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Income from continuing operations
as reported in the consolidated
statements of operations 47,730 19,672 (38,324)
Tax rate 34% 35% 36%
-------------- -------------- --------------
Statutory income tax on the above amount 16,228 6,885 (13,796)
Foreign tax rate differential (91) (7) (1,519)
Current income/ (losses) for which no deferred
tax expense (benefit) has been recorded, net (8,731) (3,851) 10,160
Tax benefits with respect to previous years (217) (758) -
Effect of lower tax rates arising from
"Approved Enterprise Status" (6,093) (1,805) 2,652
Increase in taxes resulting from
permanent differences and non deductible
expenses 2,397 2,693 7,154
Other* (39) (1,233) (2,510)
-------------- -------------- --------------
Taxes on income 3,454 1,924 2,141
============== ============== ==============
(*) Including a difference between the financial carrying amounts
of non monetary assets and liabilities and their tax basis
attributable to the rate of change in Israeli Consumer Price
Index (which serves as a basis for measurement for tax
purposes) and the rate of change in the NIS/US dollar exchange
rate, this in accordance with paragraph 9(f) of SFAS 109 (see
A4 above).
F-293
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
F. Components of deferred income tax
1. As of December 31, 2005 and December 31, 2004, deferred income
tax assets and liabilities consists of future tax assets
(liabilities) attributable to the following:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Deferred tax assets:
Capital loss carryforward 36,940 36,781
Operating loss carryforward(a) 150,491 134,471
Vacation pay accruals,
severance pay fund, net,
and other accruals 7,192 13,785
Property, plant and equipment 4,745 3,138
Other 4,976 4,577
-------------- --------------
Gross total deferred tax assets 204,344 193,252
Valuation allowance for
deferred tax assets(a) (186,527) (181,218)
-------------- --------------
Net deferred tax assets(a) 17,817 12,034
-------------- --------------
Deferred tax liabilities:
Software development costs
and other intangibles (7,826) (2,887)
-------------- --------------
Net deferred tax liabilities (7,826) (2,887)
-------------- --------------
Deferred income taxes, net(b) 9,991 9,147
============== ==============
(a) In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not
that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable
income during the periods in which those temporary
differences become deductible and during which the
carryforwards are available. Management considers the
scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in
making this assessment. Based upon the level of
historical taxable income and projections for future
taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more
likely than not that the Company will realize the
benefits of these deductible differences, net of the
existing valuation allowances at December 31, 2005. The
amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates
of future taxable income during the carryforward period
are reduced. Based on this assessment, as of December 31,
2005, the Company determined that it is more likely than
not that $ 10 million of such net deferred tax assets
will be realized, therefore resulting in a valuation
allowance of $ 186 million. A valuation allowance in the
amount of $ 28.2 million was recognized for the deferred
tax asset for Laurel Networks' tax carryforwards at the
acquisition date. The tax benefits for this item that
would be first recognized (that is, by elimination of
that valuation allowance) in financial statements after
the acquisition date would be applied to reduce the
goodwill related to the acquisition. (See also Note 19B).
F-294
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
F. Components of deferred income tax (cont'd)
1. (a) (cont'd)
The valuation allowance for deferred tax assets as of
January 1, 2005, 2004 and 2003 was $ 181 million, $
101 million and $ 94 million, respectively. The net
change in the total valuation allowance for the year
ended December 31, 2005, 2004 and 2003 was an
increase of $ 6 million, $ 80 million and $ 7
million, respectively.
If changes occur in the assumptions underlying the
Company's tax planning strategies or in the
scheduling of the reversal of the Company's deferred
tax liabilities or projections of future taxable
income, the valuation allowance may need to be
adjusted in the future.
The Company has not recognized a deferred tax
liability of approximately $ 2.1 million for the
undistributed earnings of its foreign operations that
arose in 2005 and prior years because the Company
currently does not expect those unmerited earnings to
reverse and become taxable to the Company in the
foreseeable future. A deferred tax liability will be
recognized in the event the Company is no longer able
to demonstrate that it plans to permanently reinvest
undistributed earnings. As of December 31, 2005, the
undistributed earnings of these subsidiaries were
approximately $ 15.4 million.
(b) Long-term deferred taxes in the amount of $ 9,893
thousand ( 2004 - $ 9,144 thousand) are included in
the other assets item of the balance sheet and
short-term deferred taxes in the amount of $ 98
thousands are included in other receivables.
2. As of December 31, 2005, the Company and its subsidiaries had,
for tax purposes, operating loss carryforwards, capital loss
carryforwards and general business operating loss carryforward
of $ 656 million, $ 147.7 and $ 3.7 million, respectively.
The Company and its subsidiaries had no minimum tax credit
carryover. Approximately $168 million of the federal net
operating loss carryforwards will begin to expire over the
period of 2012 through 2024. The remainder of the operating
loss carryforwards have no expiration period. Substantially,
all of the capital losses have an unlimited carryforward
period.
G. Tax assessment
Final tax assessments have been received by some of the Israeli
companies through the 2000 tax year.
F-295
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 16 - Related Party Transactions
Related parties are comprised of principal shareholders (10% and over
of the Company's share capital) and their subsidiaries and affiliates
as well as affiliates of the Company. All related party transactions
were at market rates.
Transactions with related parties are mainly as follows:
a. Sales of certain of the Company's products and expenses related to
such sales;
b. Insurance, management fees and other services;
A. Balances due from or to related parties:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Assets:
Trade receivables, net 13,544 18,362
Other receivables 1,025 236
Long-term receivables, net 88 81,112
Liabilities:
Trade payables 1,954 1,383
Other payables 486 59
B. Income from, and expenses to, related parties:
Year ended December 31
--------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Sales 23,411 25,610 28,473
Cost of revenues 1,564 3,287 8,751
Selling and marketing expenses 942 1,028 2,779
General and administrative expenses 1,682 955 8,098
Financial expenses 92 68 15
Financial income 65 47 46
Other expenses 75 - 3,400
F-296
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information
Balance sheet:
A. Cash and cash equivalents
Including deposits of $1,540 thousand at December 31, 2005 (December
31, 2004 - $55,039 thousand).
B. Short-term investments
Including restricted balances of $1,035 thousand at December 31, 2004.
C. Trade receivables
Net of provision for doubtful accounts of $ 18,471 thousand at December
31, 2005 (December 31, 2004 - $ 25,387 thousand).
The activity in the allowance for doubtful accounts for the years ended
December 31, 2005 and 2004 follows:
December 31 December 31 December 31
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Allowance for doubtful accounts at beginning of year 25,387 29,775 34,764
Additions charged to bad and doubtful debt expense 3,044 3,798 10,378
Write-down charged against the allowance (7,466) (5,588) (968)
Recoveries of amounts previously charged off (1,870) (2,598) (1,270)
Reclassified to discontinued operations - - (13,129)
-------------- -------------- --------------
Allowance for doubtful accounts at end of year* 19,095 25,387 29,775
============== ============== ==============
As to factoring of certain trade receivables, see Note 17P.
* Include allowance for doubtful accounts for long-term receivable.
F-297
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
D. Other receivables
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Employees 1,053 918
Chief Scientist 1,524 3,031
Tax Authorities 2,482 448
Deferred income tax 98 114
Accrued income and interest 3,490 2,341
Advances to suppliers 1,579 4,228
Related parties 1,025 236
Fair value of derivatives 4,798 6,265
Others 8,702 5,860
-------------- --------------
24,751 23,441
============== ==============
E. Current maturities of long-term loans
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Current maturities of long term loans - 30,000
-------------- --------------
- 30,000
============== ==============
The loans carried an annual interest rate of LIBOR plus 2% (the LIBOR
interest rate at December 31, 2004 was 1.2%).
F. Other payables and accrued liabilities
Consist of the following:
December 31 December 31
2005 2004
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Employees and social benefits 22,529 28,023
Chief Scientist 7,380 2,919
Tax authorities 16,706 11,913
Commissions payable 15,044 12,234
Advances from customers 11,207 37,202
Warranty accrual (*) 5,435 6,007
Accrued expenses 39,881 35,182
Fair value of derivatives 1,222 13,174
Other payables 1,134 2,994
-------------- --------------
120,538 149,648
============== ==============
F-298
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
F. Other payables and accrued liabilities (cont'd)
December 31 December 31 December 31
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
(*) Balance at the beginning of the year
Warranty expenses 6,007 6,328 9,546
Change in accrual (3,834) (3,123) (5,104)
Reclassified to discontinued operations 3,262 2,802 2,866
Balance at the end of the year - - (980)
-------------- -------------- --------------
5,435 6,007 6,328
============== ============== ==============
G. Disclosures about segments and related information
1. Segment Activities Disclosure:
Segment information is presented in accordance with SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
This standard is based on a management approach, which requires
segmentation based upon the Company's internal organization and
internal financial reports to management. The Company's internal
financial reporting systems present various data for management to run
the business, including statement of operations.
The Company's segments are as follows:
Broadband Access Division (formerly - Inovia)
---------------------------------------------
The broadband access division focuses on the development and production
of access products for communications systems, including broadband
solutions which make it possible to transfer multi-media content, as
well as certain narrowband solutions. These products are designed to
allow telecom operators to offer their retail customers broadband
access for data applications over telephone (copper) lines, primarily
using DSL technology.
Optical Networks Division (formerly - Lightscape and Enavis)
------------------------------------------------------------
The division is a supplier of intelligent optical networking solutions
for the metro and regional optical markets. It provides fully managed
and scalable optical networks allowing "just on time" seamless coupling
of network growth to the changing service needs of the operator, while
delivering a variety of services including data, voice and video by
means of optic DWDM, SDH/Sonet or Gigabit, Ethernet or other data
transmission interfaces.
The products are based on advanced synchronic digital hierarchy and
optical technologies. Its lead product is the XDM, an optical dubbing
system based on a new technique of band flattening which makes
extensive use of state-of-the-art technology. The XDM enables the user
to choose the initial platform for simple, low-speed, applications and,
at a later stage, to expand them as required, simply, efficiently and
at low cost
F-299
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information (cont'd)
1. Segment Activities Disclosure: (cont'd)
In addition, the division develops, markets and supplies modular
solutions for broadband management on digital cross connect platforms
for long haul applications, enabling operators to provide services in a
variety of protocols and technologies, thus profiting from the width of
the band laid in the optical infrastructure.
Data Networking Division (formerly - Laurel Networks)
-----------------------------------------------------
The division is a provider of Next-Generation IP/MPLS Multi Service
Edge Routes that combine full-feathered data service support and
complete Internet routing in carrier-class IP-based platforms. The
division's Edge Routers enable carriers to offer any type of data
service (including MPLS Layer 2, IP VPNs, Internet access, ATM, frame
relay and Ethernet and broadband) over a range of interface speeds and
access networks. To further meet the evolving service delivery needs of
carriers, service types and speeds are software-configurable to support
changing customer requirements.
Other
-----
The Other segment contains mainly the Company's manufacturing and
service units; head office and management services; general and project
management services to outside customers and others; and other
activities which are not identified with any of the operational
segments.
The Company's manufacturing and service units serve as manufacturing
and service sub-contractors and carry out activities primarily for the
above divisions and for Veraz. The cost of manufacturing is included in
the cost of revenues of each of the divisions, as applicable.
2. Operational segments statement operation disclosure:
The following financial information is the information that management
uses for analyzing the results of the operating segments.
Year ended December 31, 2005
------------------------------------------------------------------------------------
Optical Broadband *Data Other Consolidated
Networks Access Networking
$ thousands $ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- ----------- -----------
Revenues 330,684 262,453 4,289 32,492 629,918
Operating
expenses (**) 290,977 237,990 23,040 43,765 595,772
Recovery of
doubtful debts - - - (10,356) (10,356)
Impairment of loans - - - 3,000 3,000
Acquired in
process research
and development - - 890 - 890
----------- ----------- ----------- ----------- -----------
Operating income
(loss) 39,707 24,463 (19,641) (3,917) 40,612
=========== =========== =========== =========== ===========
(*) From the closing date (See Note 19B).
(**) Includes cost of sales, research and development costs, selling and marketing expenses, general
and administrative expenses and amortization of acquisition related intangible assets.
F-300
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information (cont'd)
2. Operational segments statement operation disclosure: (cont'd)
Year ended December 31, 2004
--------------------------------------------------------------------
Optical Broadband Other Consolidated
Networks Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Revenues 254,058 212,939 29,715 496,712
=========== =========== ==========- -==========
Operating expenses (*) 250,964 188,336 40,455 479,755
Restructuring expenses - - 2,585 2,585
----------- ----------- ----------- -----------
Operating income (loss) 3,094 24,603 (13,325) 14,372
=========== =========== ==========- ===========
Year ended December 31, 2003
--------------------------------------------------------------------
Optical Broadband Other Consolidated
Networks Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Revenues 177,706 182,290 32,571 392,567
=========== =========== ==========- ===========
Operating expenses(*) 207,659 165,862 42,190 415,711
Impairment of assets - - 667 667
Restructuring expenses 7,243 478 673 8,394
----------- ----------- ----------- -----------
Operating income (loss) (37,196) 15,950 (10,959) (32,205)
=========== =========== ==========- ===========
(*) Includes cost of sales, research and development costs, selling and marketing
expenses, general and administrative expenses and amortization of acquisition related
intangible assets.
3. The following financial information identifies the assets allocated to the segments:
Year ended December 31, 2005
---------------------------------------------------------------------------------
Optical Broadband Broadband Other Consolidated
Networks Access Access
----------- ----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- ----------- -----------
Assets** 207,392 112,274 79,799 128,764 528,229
Unallocated assets 320,506
-----------
Total consolidated
Assets 848,735
===========
Depreciation and
amortization 18,351 6,137 3,384 8,793 36,665
Capital investments 20,468 5,901 73,473 12,549 112,391
(**) The assets include: trade receivables (short and long-term) inventories, property,
plant and equipment, software development costs, goodwill and other intangibles.
F-301
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information (cont'd)
3. The following financial information identifies the assets
allocated to the segments: (cont'd)
As of December 31, 2004
---------------------------------------------------------------
Optical Broadband Other Consolidated
Networks Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Assets* 241,291 131,597 170,018 542,906
Unallocated assets 311,903
Total consolidated assets 854,809
Depreciation and amortization 19,910 10,146 5,300 35,356
Capital investments 15,271 6,392 13,425 35,088
(*) The assets include: trade receivables (short and long-term), inventories, property,
plant and equipment, software development costs, goodwill and other intangibles.
4. Sales to significant customers
The following table summarizes the percentage of sales to significant
customers group (when they exceed 10 percent of total revenue for
the year):
Year ended December
------------------------------------------
2005 2004 2003
---------- ---------- ----------
Customer 1 14% 13% 19%
Customer 2 13% 14% 11%
5. Information on sales by geographic distribution
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
North America 18,391 21,894 21,627
Europe 383,751 291,460 232,136
Asia Pacific
and Australia 132,580 99,436 64,731
Israel 84,149 68,742 61,818
Others 11,047 15,180 12,255
-------------- -------------- --------------
629,918 496,712 392,567
============== ============== ==============
F-302
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
H. Cost of revenues
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Finished products consumed 325,317 267,981 197,906
Other manufacturing and other service costs 31,225 25,972 43,024
-------------- -------------- --------------
Cost of revenues 356,542 293,953 240,930
Royalties - mainly to the government of Israel
(see Note 11C(1) 11,237 7,018 *(1,632)
-------------- -------------- --------------
367,779 300,971 239,298
============== ============== ===============
(*) In 2003, the Company reached an arrangement with the Chief Scientist according to
which it would be credited with the amounts of the excess royalties that were paid in
respect of the sale of certain products in prior years. Such credits amount to $ 6.3
million.
I. Research and Development costs, net
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Expenses incurred 93,080 72,893 76,557
Less - grant participations (see Note 11C) 5,791 8,023 14,516
-------------- -------------- --------------
87,289 64,870 62,041
============== ============== ===============
F-303
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
J. Selling and marketing expenses
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Salaries and employee benefits 44,224 37,387 35,033
Agents' commissions 19,826 13,457 10,903
Advertising and exhibitions 2,791 2,699 2,195
Overseas travel 5,370 5,047 4,469
Other 23,615 19,833 21,043
-------------- -------------- --------------
95,826 78,423 73,643
============== ============== ===============
K. General and administrative expenses
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Salaries and employee benefits 20,469 19,225 16,949
Rent and maintenance of premises 2,469 1,065 1,817
Bad and doubtful debt expenses 1,174 1,200 (1)9,108
Other 17,864 14,001 11,082
-------------- -------------- --------------
41,976 35,491 38,956
============== ============== ===============
(1) See also Note 4C(2).
L. Financial income/expenses, net
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Financial expenses:
Interest on loans from banks 149 1,518 2,449
Bank charges 922 2,117 1,529
Loss from marketable securities - - 111
Exchange rate differences (see Note 1A(7)) and other 2,585 2,927 4,556
-------------- -------------- --------------
3,656 6,562 8,645
============== ============== ==============
Financial income:
Interest mainly on bank deposits and receivables 4,126 3,038 6,397
Gain from marketable securities 1,648 1,482 -
Interest from marketable securities 1,919 1,877 881
Exchange rate differences (see Note 1A(7)) and other 1,164 2,772 624
-------------- -------------- --------------
8,857 9,169 7,902
============== ============== ==============
F-304
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
M. Other income (expenses), net
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Gain from sale of an investment 2,350 - -
Gain (loss) from sale of property
and equipment, net (1) 2,398 735 (167)
Provision for the payment of indirect duty (882) (1,600) -
Additional costs associated with sales
of former operations (1,513) - -
Loss from realization of investments and
allowance for impairment of investments (2) - (2,469) (1,587)
Realization of gain on available for
sales securities - 1,487 -
Gain from cancellation of a provision to the Israeli
Comptroller of Restrictive Trade Practices
(see Note 11A(5)) - 6,000 -
Loss from impairment of amounts
funded for severance pay - (1,000) -
Decline in value of convertible notes (see Note 5B) - - (3,400)
Other (436) (460) (222)
-------------- -------------- --------------
Total other income (expenses), net 1,917 2,693 (5,376)
============== ============== ==============
(1) 2005 includes gain of $ 1.8 million from sale of a building.
(2) Arising from a permanent impairment in the value of investments. The write down is
based, among other factors, on stock exchange prices, the operations of the investees
and a series of other relevant considerations.
N. Supplementary Statement of Operations information
Year ended December 31
----------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Expenses:
Maintenance and repairs 6,445 6,034 9,963
Depreciation of property, plant and equipment 23,313 22,351 23,830
Taxes (other than income taxes) 3,209 1,521 2,171
Rent 13,899 10,820 11,507
Advertising costs 4,132 3,259 1,980
Amortization of capitalized software 10,450 13,005 15,157
F-305
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
O. Earnings (loss) per ordinary share ("EPS")
Following are the details of the calculation of basic EPS:
2005 2004
---------------------------------------------- ----------------------------------------------
Net income Number of Earnings per Net loss Number of Loss per
Ordinary Ordinary Ordinary Ordinary
-------------- shares share -------------- shares share t
------------ ------------ ------------ ------------
$ in thousands in thousands $ $ in thousands in thousands $
-------------- ------------ ------------ -------------- ------------ ------------
Income (loss) from
continuing operations 39,864 110,322 0.36 14,056 108,575 0.13
============== ============ ============ ============== ============ ============
Discontinued operations - - - (3,903) 108,575 (0.04)
============== ============ ============ ============== ============ ============
Net income (loss) 39,864 110,322 0.36 10,153 108,575 0.09
============== ============ ============ ============== ============ ============
[TABLE CONTINEUD]
2003
----------------------------------------------
Net loss Number of Loss per
Ordinary Ordinary
-------------- shares share
------------ ---------
$ in thousands in thousands $
-------------- ------------ ---------
Income (loss) from
continuing operations (44,723) 107,831 (0.41)
============== ============ =========
Discontinued operations (26,317) 107,831 (0.24)
============== ============ =========
Net income (loss) (71,040) 107,831 (0.65)
============== ============ =========
F-306
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
---------------------------------------------------------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
O. Earnings (loss) per ordinary share ("EPS") (cont'd)
Following are the details of the calculation of diluted EPS:
2005 2004
---------------------------------------------- ----------------------------------------------
Net income Number of Earnings per Net loss Number of Loss per
Ordinary Ordinary Ordinary Ordinary
-------------- shares share -------------- shares share t
------------ ------------ ------------ ------------
$ in thousands in thousands $ $ in thousands in thousands $
-------------- ------------ ------------ -------------- ------------ ------------
Income (loss) from
continuing operations,
used for basic
EPS calculation 39,864 110,322 0.36 14,056 108,575 0.13
The effect of dilutive
stock option plans:
Share incentive (stock
options and
restricted shares) - 7,736 (0.02) - 8,558 (0.01)
-------------- ------------ ------------ -------------- ------------ ------------
Income (loss) from
continuing operations 39,864 118,058 0.34 14,056 117,133 0.12
-------------- ------------ ------------ -------------- ------------ ------------
Loss from discontinued
operations used
for basic EPS calculation - - - (3,903) 108,575 (0.04)
The effect of dilutive
stock option plans:
Share incentive (stock
options and
restricted shares) - - - - 8,558 0.01
-------------- ------------ ------------ -------------- ------------ ------------
- - - (3,903) 117,133 (0.03)
-------------- ------------ ------------ -------------- ------------ ------------
Net income (loss) 39,864 118,058 0.34 10,153 117,133 0.09
============== ============ ============ ============== ============ ============
[TABLE CONTINEUD]
2003
----------------------------------------------
Net loss Number of Loss per
Ordinary Ordinary
-------------- shares share
------------ -----------
$ in thousands in thousands $
-------------- ------------ -----------
Income (loss) from
continuing operations,
used for basic
EPS calculation (44,723) 107,831 (0.41)
The effect of dilutive
stock option plans:
Share incentive (stock
options and
restricted shares) - - -
-------------- ------------ -----------
Income (loss) from
continuing operations (44,723) 107,831 (0.41)
-------------- ------------ -----------
Loss from discontinued
operations used
for basic EPS calculation (26,317) 107,831 (0.24)
The effect of dilutive
stock option plans:
Share incentive (stock
options and
restricted shares) - - -
-------------- ------------ -----------
(26,317) 107,831 (0.24)
-------------- ------------ -----------
Net income (loss) (71,040) 107,831 (0.65)
============== ============ ===========
F-307
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
P. Factoring of financial assets
The Company entered into accounts receivable factoring agreements with
a number of financial institutions ("banks"). Under the terms of the
agreements, the Company has the option to factor receivables, with the
banks on a non-recourse basis, provided that the banks approve the
receivables in advance. In some cases, the Company continues to be
obligated in the event of commercial disputes, (such as product
defects) which are not covered under the credit insurance policy,
unrelated to the credit worthiness of the customer. The Company
accounts for the factoring of its financial assets in accordance with
the provisions of SFAS No. 140, and accordingly in the past, there were
no cases in which the Company had to reimburse the banks for accounts
receivables following business disputes. The Company does not expect
any reimbursements to take place in the foreseeable future.
The agreements call for factoring fees on invoices or promissory notes
factored with the banks, as follows: USD and EUR transactions - in most
cases, LIBOR for the relevant period on the basis of the semi-annual
discount to yield plus a margin of 0.96% per annum on average.
As of December 31, 2005, trade receivables amounting to $ 9,480
thousand (December 31, 2004 - $ 31,698 thousand) were factored.
Note 18 - Recently Enacted Accounting Standards
A. In December 2004, the FASB issued SFAS No. 123 (Revision 2004),
"Share-Based Payment", , that addresses the accounting for
share-based payment transactions in which employee services are
received in exchange for either equity instruments of a company,
liabilities that are based on the fair value of a company's
equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the
intrinsic value method as prescribed in APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Instead, SFAS No.
123R requires that such transactions be accounted for using a
fair-value-based method and that compensation expense be
recognized in the statement of operations rather than disclosing
the pro forma impact of the stock based compensation, as the
Company currently discloses in Note 1R.
SFAS No. 123R provides two alternative adoption methods. The first
method is a modified prospective transition method whereby a
company would recognize share-based employee costs from the
beginning of the fiscal period in which the recognition
provisions are first applied as if the fair-value-based
accounting method had been used to account for all employee
awards granted, modified, or settled after the effective date and
to any awards that were not fully vested as of the effective
date. Measurement and attribution of compensation cost for awards
that are unvested as of the effective date of SFAS No. 123R would
be based on the same estimate of the grant-date fair value and
the same attribution method used previously under SFAS No.123,
"Accounting for Stock-Based Compensation" (SFAS No.123). The
second adoption method is a modified retrospective transition
method whereby a company would recognize in its statement of
operations employee compensation cost for periods presented prior
to the adoption of SFAS No.123R in accordance with the original
provisions of SFAS No. 123; that is, an entity would recognize
employee compensation expenses in the amounts previously reported
in the pro forma disclosures provided in accordance with SFAS No.
123.
F-308
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Recently Enacted Accounting Standards (cont'd)
The provisions of SFAS No, 123R are effective for annual periods
beginning after June 15, 2005. This Standard will be effective for
the Company as of January 1, 2006. The Company plans to adopt SFAS
No. 123R using the modified prospective method. The adoption of
SFAS No. 123R's fair value method will have a significant impact
on the Company's results of operations, although it will have no
impact on the Company's overall financial position and cash flows.
The Company expects stock-based compensation expense under SFAS
No. 123R, related to stock-based awards issued through fiscal
2005, to be approximately $ 9.9 million, $ 5.2 million, $ 2.1
million and $ 0.7 million in fiscal 2006, 2007, 2008 and 2009,
respectively. In addition, the Company expects to grant additional
stock-based awards in future years, which will result in
additional stock-based compensation expense.
In March 2005, the SEC released SAB No. 107, "Share-Based Payment"
(SAB 107). SAB 107 expresses views of the SEC staff regarding the
application of SFAS No.123R. Among other things, SAB 107 provides
interpretive guidance related to the interaction between SFAS
No.123R and certain SEC rules and regulations, as well as the
staff's view regarding the valuation of share-based payment
arrangements for public companies. The company will follow the
interpretive guidance set forth in SAB 107 during the adoption of
SFAS 123R.
B. In March 2004, the EITF reached a consensus on Issue No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-01"). EITF 03-01
provides guidance on other-than-temporary impairment models for
marketable debt and equity securities accounted for under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," and non-marketable equity securities accounted for
under the cost method. The EITF developed a basic three-step model
to evaluate whether an investment is other-than-temporarily
impaired. The FASB issued proposed FSP EITF 03-1-a in September
2004, which delayed the effective date of the recognition and
measurement provisions of EITF 03-01. On November 2005, the FASB
issued FSP FAS 115-1 and 124-1 ("FSP") which nullifies the
guidance in EITF 03-1 for determining whether impairment is
other-than-temporary. However, it carries forward many of the
provision of EITF 03-1. The guidance of the FSP is effective to
reporting periods beginning after December 15, 2005. The Company
does not expect the adoption of the FSP to have a material impact
on its financial position and results of operations.
C. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -
an amendment of Accounting Research Bulletin No. 43, Chapter 4".
The amendments made by SFAS No. 151 clarify that abnormal amounts
of idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The company
does not expect the adoption of SFAS No. 151 to have a material
impact on its financial statements.
F-309
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 18 - Recently Enacted Accounting Standards (cont'd)
D. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non
monetary Assets - an amendment of Accounting Principles Bulletin
(APB) Opinion No. 29, Accounting for No monetary Transactions".
The guidance in APB Opinion No. 29 (Opinion 29) is based on the
principle that exchanges of no monetary assets should be measured
based on the fair values of the assets exchanged. The guidance in
Opinion 29, however, included certain exceptions to that
principle. SFAS No. 153 amends Opinion 29 to eliminate the
exception for no monetary assets exchanges of similar productive
assets and replaces it with a general exception for exchanges of
no monetary assets that do not have commercial substance. A no
monetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for fiscal
periods beginning after June 15, 2005 and shall be applied
prospectively. The adoption of this statement is not expected to
have a material impact on the company's financial position and
results of operations.
E. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Errors Corrections". SFAS No. 154 replaces APB Opinion No. 20,
"Accounting Changes", and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements", although it
carries forward some of their provisions. SFAS No. 154 requires
retrospective application to prior periods' financial statements
of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. A change in depreciation, amortization, or
depletion method for long-lived, no financial assets will be
accounted for as a change in accounting estimate effected by a
change in accounting principle. SFAS No. 154 is effective for
changes in accounting principle made in fiscal years beginning
after December 15, 2005. The company does not expect the adoption
of SFAS No. 154 to have a material impact on its financial
position or result of operations.
F. In February 2006, the FASB issued SFAS No. 155 "Accounting for
Certain Hybrid Financial Instruments." SFAS No. 155 amends SFAS
No. 133 and SFAS No. 140, and allows financial instruments that
have embedded derivatives that otherwise would require bifurcation
from the host to be accounted for as a whole, if the holder
irrevocably elects to account for the whole instrument on a fair
value basis. Subsequent changes in the fair value of the
instrument would be recognized in earnings. The standard also:
o Clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133;
o Established a requirement to evaluate interests in
securitized financial assets to determine whether interests
are freestanding derivatives or are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation;
o Clarified that concentrations of credit risk in the form of
subordination are not embedded derivatives, and
o Amends SFAS No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative
financial instrument that pertains a beneficial interest
(that is itself a derivative financial instrument).
SFAS No. 155 is effective for all financial instruments
acquired or issued after the beginning of an entity's first
fiscal year that begins after September 15, 2006. The Company
is currently evaluating the impact adoption of SFAS No. 155 on
its financial position and results of operations.
F-310
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 19 - Acquisitions
A. In April 2005, the Company acquired the optical activities and
technology of Eastern Communications Co., Inc. for approximately $
8.5 million. The operations of the acquired unit have been merged
with ECI's existing joint venture in China - Hangzhou ECI
Telecommunication Co. Ltd. (HETC). Of the $ 8.5 million purchase
price, $ 4.2 million was assigned to net tangible assets and $ 4.3
million was assigned to Core Technology products. As a result of
the transaction ECI's holdings in HETC increased to approximately
72.4%.
B. On June 3, 2005, the Company acquired 100% of the outstanding
common shares of Laurel Networks Inc. The results of Laurel
Networks Inc.'s operations have been included in the consolidated
financial statements since that date. Laurel Networks Inc. is an
innovative provider of Next-Generation IP/MPLS Multi Service Edge
Routers. The aggregate purchase price was $ 88 million in cash.
The Company also incurred transaction costs, consisting primarily
of professional fees amounting to approximately $ 1.75 million in
connection with this acquisition. After the transaction, Laurel
Networks became the "Data Networking" division of ECI.
The acquisition is accounted for under the purchase method of
accounting. The purchase price of Laurel Networks has been
allocated based on independent appraisals and management
estimates. The allocation of the acquisition cost is as follows.
Fair value $ in thousands
Tangible assets:
Net current assets 14,881
Property, plant and equipment 3,156
Long-term liabilities (157)
--------
Net tangible assets 17,880
Intangible assets:
Core technology products 33,820
In-process research and development 890
Backlog 100
Goodwill 37,060
--------
71,870
--------
Net assets acquired 89,750
========
F-311
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 19 - Acquisitions (cont'd)
Of the $ 34.8 million identifiable intangible assets, $ 33.8
million was allocated to Core Technology products that have a
weighted-average useful life of approximately ten years, $ 100
thousand was allocated to backlog that have a weighted average
useful life of less than one year and $ 890 thousand was allocated
to in-process research and development assets. Such amount
represents the value attributed to research and development
projects of the acquired company that were commenced but not
completed at the date of acquisition, for which technological
feasibility has not been established and which have no alternative
future use in research and development activities or otherwise. In
accordance with FASB Interpretation No. 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the
Purchase Method. The amount allocated to in-process research and
development was written off at the date of acquisition. This
write-off is included in the statements of operation in a separate
line "Acquired in-process research and development".
The $ 37.1 million goodwill was derived by applying the "Residual
Approach". Under this approach, the total Purchase Price is
allocated to tangible assets and to specifically identifiable
intangible assets, with any remainder allocated to goodwill. The
goodwill was assigned to the "Data Networking" segment.
The Company believes that the Laurel acquisition resulted in the
recognition of goodwill primarily because Laurel's products and
technology will add edge routing and IP service capabilities to
ECI's overall portfolio of IP solutions, and will strengthen ECI's
position as a supplier of next-generation IP solutions. This
acquisition enhances ECI's ability to meet customers' needs with
innovative solutions as their next-generation multi-service
networks evolve toward a single converged IP network.
Set forth below is certain unaudited pro forma combined statements
of income data for the year ended December 31, 2005 and 2004, as
if the acquisition of Laurel Networks Inc. occurred on January 1,
2005 and 2004, respectively, after giving effect to: (a) purchase
accounting adjustments, including amortization of identifiable
intangible assets and adjustments for acquired in-process research
and development; and (b) estimated reduction of interest income
due to the decrease in on ECI's cash and cash equivalents and
marketable securities used as cash consideration in the
acquisition.
The pro forma financial information is not necessarily indicative
of the combined results that would have been attained had the
acquisition taken place at the beginning of 2005 and 2004,
respectively, nor is it necessary indicative of future results.
Year ended December 30
-----------------------------
2005 2004
---------- ----------
$ in thousands,
except earnings per share
-----------------------------
(Unaudited)
Sales 634,695 513,535
========= =========
Net income (Loss) 27,693 (12,702)
========= =========
Earnings (loss) per share:
Basic 0.25 (0.12)
========= =========
Diluted 0.23 (0.12)
========= =========
F-312
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 19 - Acquisitions (cont'd)
C. In September 2005, the Company acquired the sales and support
activities of MMG Ltd., including the rights that the Company
had previously granted to MMG to distribute and install the
Company's products in Russia ("the Rights"), for the sum of
approximately $ 5.3 million. Of the $ 5.3 million purchase
price, $ 1.6 million was assigned to net tangible assets, $
1.8 million was assigned to the Rights, $ 0.7 million was
assigned to Customer Relationships and $ 1.2 million was
assigned to goodwill.
Note 20 - Restructuring
A. Following the Company's Board of Directors' decision to focus
on its two core activities, in the first quarter of 2004, the
Company recorded $ 2,585 thousand in restructuring expenses
associated with the completion of reorganization plan and the
integration of Lightscape Optical Networks and Enavis Networks
into the Optical Networks Division. The expenses were due to
abandonment of several leased buildings.
B. A reconciliation of the beginning and ending restructuring
liability balances is as follows:
Year ended
December 31,
2005
Rent contract
$ thousands
At the beginning of the year 4,574
Restructuring expenses -
Paid 1,395
-------------
At the end of the year 3,179
=============
Year ended December 31, 2004
-------------------------------------------
Severance
pay Rent contract Total
----------- ------------- -----------
$ thousands $ thousands $ thousands
----------- ------------- -----------
At the beginning of the year 707 5,450 6,157
Restructuring expenses - 2,585 2,585
Paid (707) (3,461) (4,168)
----------- ------------- -----------
At the end of the year - 4,574 4,574
=========== ============= ===========
F-313
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 21 - Impairment of Loans and Impairment of Assets
A. For the year ended December 31, 2005
During 2005, the Company recorded $ 3.0 million impairment charges
associated with loans in the aggregate amount of $ 6.0 million provided
to Chiaro. See Note 5B and Note 23.
B. For the year ended December 31, 2003
During 2003, the Company recorded $0.7 million impairment of assets
charges associated with NGTS.
Separately, the Company recorded, as part of the loss on discontinued
operations, a $6.0 million impairment charges associated with ECtel,
arising from the write-down by ECtel of goodwill from the acquisition
of Telrad Hawk Net-I Ltd. in October 2001.
Due to significant reduction in ECtel's revenues, it was determined
that goodwill had been impaired.
This determination was based upon the guidance set forth in paragraphs
19-22 of SFAS No. 142, which requires a two-step analysis. The first
step used the Discounted Cash Flow approach to measure the fair value
of the Telecommunication Systems reporting unit of ECtel Ltd., the
result of which indicated that the carrying amount of such reporting
unit, including goodwill, exceeded its fair value. The second step was
then conducted in order to measure the amount of impairment loss, by
means of a comparison between the implied fair value of the goodwill
and the carrying amount of the goodwill. In the second step, the fair
value of the Telecommunication Systems reporting unit of ECtel, as
determined in the first step, was assigned to the reporting unit's
individual assets and liabilities. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and liabilities
represented the amount of the implied fair value of the goodwill. The
excess of the carrying amount of goodwill over the implied fair value
of goodwill was identified as the amount of the impairment loss.
See also Note 22C.
Note 22 - Discontinuance of Operations
A. During the third quarter of 2002, the Company's Board of
Directors decided on a plan to sell the operations of the
InnoWave segment, which specialized in development of
solutions for broadband wireless access to communications
networks.
In April 2003, the Company signed an agreement with Alvarion
to sell the InnoWave operation. The total value of the
transaction was approximately $ 20 million, consisting of a
cash consideration paid by Alvarion and the cash balances
withdrawn by ECI at closing. In addition, Alvarion granted the
Company warrants to purchase 200,000 Alvarion shares at an
exercise price of $ 3 per share (of which, warrants to
purchase 50,000 Alvarion shares were transferred to certain
key InnoWave employees transferred to Alvarion). In the first
quarter of 2004, the Company sold all the shares it had
obtained from exercising the aforementioned warrants. The gain
from the sale of the shares amounted to $ 1.5 million and was
recorded in other income.
F-314
ECI Telecom Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------
Note 22 - Discontinuance of Operations (cont'd)
B. During 2003, ECtel's Board of Directors decided on a plan to
sell the operations of the Government Surveillance business of
ECtel, which provided telecommunication monitoring needs to
government agencies.
In February 2004, ECtel signed a definitive agreement to sell
the Government Surveillance business to Verint Systems Inc.
for $35 million in cash. According to the terms of the
transaction, ECtel transferred to Verint various assets and
liabilities relating to its Government Surveillance business
and undertook certain commitments to Verint. ECtel recorded in
the first quarter of 2004 a gain of $ 24.2 million in respect
of this transaction.
On May 10, 2004, the Company distributed 7.6 million shares of
ECtel to the Company's shareholders of record on May 5, 2004.
Before distribution, the Company held approximately 10.5
million, or 58%, of ECtel's shares. Following the distribution
of the shares, the Company holds approximately 16% of ECtel's
outstanding shares.
C. Results of operations of the discontinued segments
Year ended December 31
--------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Revenues - 3,948 44,697
Expenses, including income taxes (1) - (7,851) (71,014)
-------------- -------------- --------------
Net results - (3,903) (26,317)
============== ============== ==============
(1) Including, loss from disposition for the year ended December 31, 2004 in the
amount of $ 3,681 thousand and impairment of goodwill for the year ended December
31, 2003 in the amount of $ 6,017 thousand.
F-315